Economic Analysis of Italy and United States - Курсовая работа

Contents Introduction 1. Long run models 1.1 Italy 1.2 USA 2. Short run models 2.1 Italy 3.2 USA Conclusion References Introduction The aim of this paper is to employ short run and long run macroeconomic model to see whether they are in line with key economic changes in selected countries (Italy and the USA). Naturally, it is important to highlight significant economic changes in the abovementioned economies. The focus period of the study is 2001 - 2010. Finally a specific economic policy will be analyzed as a case study. This case study involves open market operation of the European Central Bank and its impact on the economy of the USA and Italy. There are various macroeconomic models that deal with short run economic fluctuations and long run economic growth (Mankiw, 2009). In this study I will focus on two separate cases: small open economy in the long run (Italy) and large open economy in the long run. 1. The openness of economy is measured by various indicators. Most of the empirical studies use trade as a share of as a measure of openness (Shamsadìni et al, 2010). As it can be seen in the Italy is an open economy with openness equal to 60% of the GDP, compared to 31% and 54% in Japan in Russia accordingly (Figure 1). Figure 1 - Trade as a share of GDP, 2011 There is fundamental macroeconomic distinction between closed and open economy. Spending in an open economy doesn’t match its production of goods and services as an open country can increase its spending by borrowing from abroad. Moreover output can be above spending as an open economy can be a net lender as well (Mankiw, 2009). In order to see this it is important to focus on national accounting model. The national income in closed economy is given by: Y=C I G; where C is consumption, I is investment and G is government spending. Altering national income to open economy macroeconomic theory introduces exports (E) and imports (M): Y = C I G X-M or Y= C I G NX National savings in Italy, which is an open economy, consist of private savings (Y-T-C) and public savings (Y־G). Therefore: S=I NX or S-I=NX where S-I denote net capital outflow and NX is trade balance of a country. In case when S>I is increase in foreign purchases of home assets which means claim on future output of home country. To formulate a model for a small open economy I use four assumptions: First, production of goods and services in the small open economy consists of three sectors, consumption goods. investment goods, and government services. Second, production function of each of the sectors includes capital and labor in different proportions in linear homogeneous production functions (Hodrick, 1980): Y=F(K,L) Third, investment (I) is inversely related to the interest rate: I=I(r) Fourth, consumption is positively lined with disposable income: C=C(Y-T) Which yields: NX=(Y-C-G)-I; NX = S-I; NX = Y-C(Y-T)-G-I(r*) where r* denotes world interest rate.