Marc Tonda Llombart

INTERNATION
AL ECONOMIC
POLICY
PRACTICAL ACTIVITY #1

Exercice 1
A: Alfredo Fierro makes a parallelism between the ancient societies which
overuse theodicy to question the existence of God or even its intervention
into the natural disasters and catastrophes with the current malformed and
obscene societies which rejects for its incrimination in the unequal, unfair
and discriminator development of the world.
Alfredo exalts Ivan Karamazovs figure in the sense of rising up against ideal
and utopian paradises. We have to refuse Leibnizs thought and his idea of
this world is the best of all the possible worlds. Its time to impose acts,
set changes and get results from economic policies utility.
B: I hardly believe that Alfredo Fierro get a relationship between God and
Economic Policy. Let me explain it. God was for ancient societies a way of
justifying what was happening in the real world in that period. People turn to
Gods decision when something didnt go as well as they thought. Instead
of using their faith in achieving better goals they followed other objectives,
for sure, the God they dignify should be disappointed with.
The link that I see between God and Economic Policy is that today
economist look at them (Economic Policies) in the same way as previous
societies look at him (God). Policy makers should not fall back into the same
error. Economic Policies should not be considered tools to blame in.
Economic Policies were made to change rules and not to justify imbalanced
worlds running. So, by the way, lets use it and leave the belief that God
by himself will change it.
Exercice 2
Janes view is based on a polytomous economic policy structure. It means
that theres not a lonely way of understanding and structuring the
instruments and objectives of economic policies. In addition, this structure
presents three types of economic policies:
Constitutional Policies: those aimed at maintaining economic order and
functioning rules.
Purely Economic Goals Policies: these ones are subordinated to the
constitutional policies and are made to run basic economic goals (growth,
price stability, full employment)
Specific Economic Goals: are subordinated to the others and looks for some
specific and temporal goals.
On the other hand, Buchanans view distinguishes between constitution
which determine the policy process and policymakers decisions that are set
inside its constitution. That is, the results obtained through any particular
economic policy (policy act) are settled by the rules that are laid down in the
constitution. It means that constitution is the set of rules which govern the
process of making of policies.

So, at this point, as there is not any degree of freedom normative analysis is
useless.

Exercise 3
Is well known that political processes have had an important weight into the
economic policy roles. Politicians set a kind of contract with citizens where
the contract is a promise of a policy (program) in return for votes (or
contributions). Although the intention of the contracts is such to force
politicians to serve the general interests, nothing can guarantee this.
Political institutions and organizations could be considered governance
structures. These are characterized by various agency relationships. From
an economic approach, citizens or voters are considered the principals and
the politicians or parties the agents. Agencies are created as parts of the
legislative or the executive branches of government and are formally
responsible to the Congress or the president. Nevertheless, each branch
wields some power over the others agents, and other are influenced by
powerful minorities such us courts, lobbies or the media. Therefore, some
politicians are considered to have a double agent side or facet.
The purpose of these influences is about economic interests: perhaps
politicians with specific assets in locations or industries, pivotal supporters
with economic investments in those set of firms, political hold-up from these
interest groups.

Source: El Pas / Economa (11/05/2014)

Prime Ministers annual wage (2014) : 78.185,04
Source: Web site of the Congress / Web site for Transparency of the
Government Presidency.

Economics and Competition Ministers annual wage (2014) :

71.239,56
Source: Web site of the Congress / Web site for Transparency of the
Economic and Competition Ministry.
From my point of view, I think that politicians and policymakers are not
enough well-paid. Its not clear which a medium CEO could earn 60 times
more (on average) than policymakers. We should have to take into account
that CEO take decision over its company and the second ones over the
whole run of the economy in a country or union.
Exercise 4
Demand inflation is considered to be the most classical explanation for
inflation. This occurs when aggregate demand exceeds aggregate supply.
So, then prices increase.
There are two explanations which can explain that bias between supply and
demand. Particularly why theres an excess in demand.
One of them is monetarist critique which state that demand excess is
caused by an excess in quantity of money. Moreover, it sets that monetary
policy is too expensive.
On the other hand, Keynesianism critique states that what cause excess of
demand is not the quantity of money but the public deficit or a
budgetary policy structurally unbalanced. The main problem lies on
the correlation between fiscal and monetary policy. To finances this increase
in public expenditure (G) government need to increase to print money too
(increase money supply).
Secondly, there are also problems related to time inconsistency. Time
inconsistency means that sometimes governments feel tempted to change
suddenly policies which were announced. These changes happen due to the
introduction of new and different targets. Although these reoptimisations
seem optimal at this time, might not be so from the perspective of the
original long-term plan, thus giving rise to inferior outcomes and above all
generating distrust in the government.
Another reason for inflation could be structural unequal demographic
growth. Demography shows that each there is more and more people in
the world. Its clear that this people need to consume resources and goods
to survive. If resources (supply) are considered limited and demography
growth (demand) unstoppable, prices will always increase permanently
because Demand will always be higher than Supply.
Exercise 5
The articles explain us that globalization has let to weaken the link between
domestic cost pressures and inflation. It means that global forces have

become more important relative to domestic factors in determining inflation

in individual countries.
In addition, the link between inflation and labor costs have also faded in
developed countries. This reflects 2 things: Firstly, the integration of BRICS
with vast supplies of cheap labor has curbed the bargaining power of
workers in developed countries. And second, fiercer global competition has
made it more difficult for firms to pass increases in wages through to prices.
Instead they must absorb them in their profit margins. As a result, domestic
cost pressures in labor, no longer lead automatically to higher inflation, but
are more likely to show up as swings in profit margins.
This suggests that in forecasting inflation central banks now need to pay
less attention to domestic shifts in unemployment and much more to the
global balance between supply and demand. Globalization has borne down
on inflation in past years. However, capacity constraints will eventually
appear in the global economy, just as they always have at the national level.
Globalization may require central bankers to steer policy that take much
more developments abroad.
Exercise 6
Krugman argue that Europa is suffering a downward spiral deflation. The
problem lies in the insufficient expansive monetary policies of the European
Central Bank. He talks about two causes: power of truthiness and class
interest.
The first one means that people feel true things that arent true. He puts on
the text a clear example: The Fed prints money, printing money leads to
inflation, and inflations in considered a bad thing. People prefer truthiness
to more complicated true.
The second one is about interests. Politicians do not incentive increasing
prices because inflation hurts creditors and helped debtors, deflation is just
the opposite. Moreover, especially in Europe, creditor interests are so
powerful because creditor nations have ended up dictating policies for the
whole of Europe.
In addition, Appelbaum has also cites some economists which are in favor
of small but higher than 0 inflation rates for the economy Most of them set a
relation between inflation, higher wages, higher firms profits. Moreover, they
said that inflation helps people and business to borrow money and spend it
more quickly.
From the point of view of these recognized economists seems clear that
inflation has larger positive effects than deflation. However, high inflation
rates could make the economy unstable and bring us greater troubles than
benefits.
Exercise 7
A:

a) [(1 Car SEAT Ibiza 1600 x 15.000 ) + (10 Tn. Of coal of gasoil for
heating x 700 /Tn) + (100 Kg. of oranges x 0,5 /Kg) + (6 haircuts x
15 /haircut) + (4 Bic pens x 0,25 /pen)] / [(1 Car SEAT Ibiza 1600 x
10.000 ) + (10 Tn. Of coal of gasoil for heating x 300 /Tn) + (100
Kg. of oranges x 1 /Kg) + (6 haircuts x 4 /haircut) + (4 Bic pens x
0,2 /pen)] = (22.141 / 13.124,8 ) x 100 = Today, average
prices are 68,7 % higher than in 1984.
b) [(1 Car SEAT Ibiza 1600 x 15.000 ) + (10.000 lit. of gasoil for heating
x 0,60 /l) + (100 Kg. of oranges x 0,5 /Kg) + (6 haircuts x 15
/haircut) + (4 Bic pens x 0,25 /pen)] / [(1 Car SEAT Ibiza 1600 x
10.000 ) + (10.000 lit. of gasoil for heating x 0,35 /l) + (100 Kg. of
oranges x 1 /Kg) + (6 haircuts x 4 /haircut) + (4 Bic pens x 0,2
/pen)] = (21.141 / 13.624,8 ) x 100 = Today, average prices
are 55,17 % higher than in 1984.
c) [(1 Car SEAT Ibiza 1600 x 15.000 ) + (10.000 lit. of gasoil for heating
x 0,60 /l) + (100 Kg. of oranges x 0,5 /Kg) + (6 haircuts x 15
/haircut) + (4 Bic pens x 0,25 /pen) + (1 PC x 800 ) / [(1 Car SEAT
Ibiza 1600 x 10.000 ) + (10.000 lit. of gasoil for heating x 0,35 /l) +
(100 Kg. of oranges x 1 /Kg) + (6 haircuts x 4 /haircut) + (4 Bic
pens x 0,2 /pen)] = (21.941 / 13.624,8 ) x 100 = Today,
average prices are 61,04 % higher than in 1984.

1- Not at all. Because the quantities in 1984 and in 2014 were and
are the same. So it wont be any differences using either
Laspeyres Index or Paasche Index. Therefore, we wont get an
accurate result. Itll get either underestimate or
overestimate inflation.
2- Not at all. Were still having the same problem as in a). Moreover,
we are confusing changes in prices in changes in products
qualities. (From coal to oil).
3- We have distorted even more the results because we have
included a product that didnt exist on 1984 yet. In addition, we
have created a bias due to the appearance of new products.
B:
a) Inflation rate = 68,7 %.
Average Monthly Pension per Person in 1984 = 300 EUR.
Pension Total Amount in 2014 = (300 x 1,687 x 12) X 5.10 =
30.366 Millions of .
b) Inflation rate = 55,17 %
Average Monthly Pension per Person in 1984 = 300 EUR.
Pension Total Amount in 2014 = (300 x 1,5517 x 12) X 5.10 =
28.026 Millions of .

My conclusion is that if changes in quality prices were taken into

account, pensions will not suffer such a big increase.
c) It could be also interesting to do this exercise for nominal wages,
GDPs, bank deposits