Adaptive Expectation
In economics, adaptive expectations means that people form their expectations about what will happen in the future based on what has happened in the past. For example, if inflation has been higher than expected in the past, people would revise expectation for the future.
Sticky price
Sticky, in the social sciences and particularly economics, describes a situation in which a variable is resistant to change. For example, nominal wages are often said to be sticky in the short run. Market forces may reduce the real value of labour in an industry, but wages will tend to remain at previous levels in the short run. This can be due to institutional factors such as price regulations, legal contractual commitments (e.g. office leases and employment contracts), labour unions, human stubbornness, or self interest. Stickiness normally applies in one direction. For examples, a variable that is sticky downward will be reluctant to drop even if conditions dictate that it should. However, in the long run wages will drop to equilibrium level.
Economists tend to cite four possible causes of price stickiness: menu costs, money illusion, imperfect information with regard to price changes and fairness concerns. Robert Hall cites incentive and cost barriers on the part of firms to help explain stickiness in wages.
Leftward movement versus rightward movement
Since rightward movement is regarded in all European traditions as corresponding to that of the sun, and hence beneficial and joyous, circling to the left is necessarily ‘backwards’, reversing the norm. Folklore links leftward circling with bad luck, cursing, witchcraft, and raising the Devil. Until the 19th century, this was purely a Scottish and Irish belief, though one which intrigued English observers, as shown by quotations in the OED (under ‘sunways’ and ‘withershins’) and in Opie and Tatem (1989: 383-6). The few English references in Victorian times concerned the bad luck involved if a funeral or bridal procession moved anticlockwise. Nowadays, popular writers have built up a conventional picture of black magic rituals, in which turning withershins causes evil, and the belief has become more widespread.
A circling movement made by turning to the right is described as a ‘right-handed’, ‘clockwise’, or ‘sunwise’ turn, and is regarded as bringing good luck. Though the belief is strongest in Scotland and Ireland, it was customary in parts of England in 19th century country funerals to carry the coffin sunwise round the churchyard (Hereford Times (20 Mar. 1838), cited in Opie and Tatem, 1989: 384). Recent instances of the idea in England are that when making sauces, puddings, or cakes the stirring must always be done clockwise, or the cooking will go wrong; that ropes should be coiled clockwise; even, that in stirring tea and laying a table one must never go ‘against the sun’ (Opie and Tatem, 1989: 385-6). The primary reason why this direction of movement is said to be ‘sunwise’ appears to be that in order to remain facing the sun as it moves from east through south to west, one has to pivot round constantly to one's right.
Fallacy of division vs Fallacy of composition (W)
A fallacy of division occurs when one reasons logically that something true of a thing must also be true of all or some of its parts.
The converse of this fallacy is called fallacy of composition, which arises when one fallaciously attributes a property of some part of a thing to the thing as a whole.
Macroeconomics / Rudiger Dornbusch - HB171.5 .D619 2006
13.3 Investment and Aggregate Supply
Investment is an important component of AD. Investment also increases capital, increasing the productive capacity of the economy. In the short run, investment does not matter for AS but in the long run it does. A little back-of-the-envelope arithmetic can help us to make sense of this apparent contradiction.
We saw in Insight 13.1 that a year’s worth of investment is typically about 1/15 of the capital stock. Suppose someone found a policy to increase investment by 25 per cent more than it would otherwise have grown. (The historical record suggests that no one has come up with an idea nearly this effective – but hope springs eternal!) Over the course of a year the effect of the policy would be to increase capital by about 1/60 extra, or about 1.6 percent. Looking back at what we learned about growth accounting in C3, this would translate into an increase in GDP of about 4/10 of 1 per cent. The notion that short-run policy might increase investment by 25 percent is probably outlandish. The short-run supply side effect of any realistic policy will probably be too small to measure.
While the short-run supply-side effects of stimulating investment are likely to be quite limited, increasing investment may be among the most important tools for long-tem prosperity. The effect of modest annual increases in the capital stock can accumulate to be quite large over long periods. We can see the evidence for this by looking at the very high rates of investment as countries move into modern development, with very high rates of growth sustained for considerable periods.
Investment and government
This chapter has concerned itself with private investment. We should, however, make a few brief comments concerning the importance of public investment. In particular, economists are often concerned about the consequences of short-run crowding out of private investment by government budget deficits, which are assumed to mostly fund government consumption expenditure.
However, recent developments in the theory of FP have begun to focus on the importance of government investment behavior in determining private sector investment performance. A traditional responsibility of government is to supply mush of the economy’s basic infrastructure, which largely takes the form of the provision of public goods that the private sector would not otherwise provide. It is quite possible that private business will be more likely to make more profitable investments in an economy that has large quantity of high-quality infrastructure, much of which may need to be provided by the government. By this we mean public infrastructure such as the transport infrastructure (for example, roads, railways and airports), the communications infrastructure (such as telephone cables) and the social infrastructure (such as schools, universities and the legal system).
In light of this positive relationship between private and public investment, perhaps we should be concerned about the decline in public investment expenditure in Australia, which has fallen from around 7 per cent of GDP in the 1960s and 1970s to around 4 percent of GDP today. Figure 13.20 (see ABS Time Series Statistic Plus, National Accounts Database, in dX Database) illustrates this decline. The suggestion could be that governments that tend to secure balanced budgets, or fiscal surpluses, by cutting public investment rather than public consumption, might in fact still be crowding out some private investment.
On the other hand, what we have seen around the world in the last 30 years is a shift towards private provision of many forms of infrastructure. Governments have devolved themselves of activities that were formerly assumed to be best provided by government, but are now assumed to be efficiently provided by the private sector – for example, the private provision of tool roads, the building of new airports and the renovation of old ones, and the move towards private education.
Nevertheless, certain types of public infrastructure investment are likely to be extremely important in facilitating private investment and driving long-run economic growth. The mix between government consumption and government investment in any FP changes that occur is something we should recognize as important.
Investment around the world
One reason that high-growth countries are high-growth countries is because they devote a substantial fraction of their output of investment. Table 13.3 shows the ratio of gross fixed capital formation of GDP to several countries. The investment ratios are determined by both the demand of capital, as studied in this chapter, and the supply of savings.
| Table 13.3 Ratio of investment of GDP (%) | ||
| Country | 1975 | 2002 |
| Australia | 22.1 | 24.1 |
| NZ | 19.3 | 20.3 |
| US | 17.6 | 18.2 |
| Canada | 24.4 | 19.6 |
| Japan | 32.5 | 25.6 |
| Korea | 24.9 | 26 |
| Singapore | 35.1 | 20.6 |
| Bangladesh | 5.5 | 23.1 |
| Ethiopia | 5.5 | 20.5 |
Source: International Financial Statistics Yearbook, 2003 and the World Bank World Tables in dX Database (ratio of total gross fixed capital formation to GDP)
Table 13.3 suggests that high rates of investment occur in rapidly growing countries but not necessarily in countries that have already become very wealthy. In both 1975 and 2002, Australia and NZ were wealthy countries with moderate growth rates. In 1975, Japan was a moderately well off country with a high growth rate. Over this period, both Singapore and Korea grew very rapidly, due in part of their high rates of investment, but Bangladesh and Ethiopia, had investment rates too low to support rapid growth. By 2002, although both countries remained relatively poor, their investment rates had picked up considerably.
The relatively low rates of investment in Australia, NZ, US and Canada, compared with their international competitors, is a source of long-run concern to policy makers.
