Economic Literacy Activity Pack

Debt and Development Coalition Ireland:
All Hallows,
Grace Park Road,
Drumcondra, Dublin 9
Ph/Fax: + 353 1 857 1828
e-mail: ddc@connect.ie

Written by Emily Kawano
Institute for Popular Economics
Email: e@kawano.freeserve.co.uk

Module Two: Economic Growth and the Macro Economy

This Economic Literacy workshop aims to introduce participants to economics using learner centred and participatory methods. This is intended to be a one day workshop for groups of approximately 8 to 14 people. It is aimed at those with no background in economics. There are extensive facilitator notes included to guide trainers/facilitators through the day.

Suggested format:

10.00 Welcome (30 min.)

10.30 Development and Growth (1 hr. 15 min.)

11.45 Tea/Coffee Break

12.00 Development and Growth continued (30 min.)

12.30 Lunch

1.30 Macroeconomic policy (1 hr.)

2.30 Coffee/Tea

2.45 Macroeconomic policy continued (1 hr.)

3.45 Action and Reflection (30 min.)

4.15 Evaluation

4.30 End

Optional exercise: Poverty Reduction Strategy - role play (1 hr. 10 min.)

TABLE OF CONTENTS

A. Welcome (30 min.)

i. Introductions (10 min.)

Facilitator introduces him/herself - housekeeping items can be mentioned etc. Facilitator can then ask participants to introduce themselves: names, organisation, training background etc.

ii. Activity: Hopes and fears (15 min.)

Objectives:

• To share hopes for the workshop which can help the facilitator shape the agenda.
  
  
• Because economics is often so intimidating, it is very important to give participants a chance to express their fears and anxieties. It gives the facilitator a chance to address and allay the fears, and also participants are usually relieved to see that others have the same fears.

Materials: Flipchart paper, Bluetack, Post-its, Pens

Put up two sheets of flipchart paper, one with hopes and the other with fears as a heading. Circulate pads of post-its. Give participants a few minutes to write their hopes and fears on the post-its - one per post it. (Fears regarding this workshop can include fears that extend beyond the workshop - eg. I am worried that my child wasn't feeling well this morning. These worries can affect concentration and it can be helpful to be able to 'vent' a bit.)

Collect the post-its, read them out and put up on the appropriate heading. Try to group similar comments together. Briefly respond to comments.

iii. Agenda review (3 min.)

Go over the agenda and make changes if appropriate.

iv. Groundrules (2 min.)

Agree the groundrules for the day/session. If you have time you could brainstorm the groundrules. Here are some of the standard ones, ask if there are any additions.

• Respect diversity of opinions, backgrounds and experiences
  
• No side conversations
  
• Allow equal participation
  
• One speaker at a time
  
• Confidentiality - anything personal said in the room stays in the room.
  
• Turn off mobile phones

Materials: Flipchart, markers, bluetack

i. Brainstorm - What is development? (10 min.)
Ask participants what comes to mind when they think of economic development or progress. Write responses on the flipchart.

Discussion Points:

• In mainstream circles, economic performance is largely judged by the rate of economic growth as measured by GDP or GNP which we will define in a moment.
  
• Note that the mainstream analysis, many of the factors that participants would value as a measure of economic development such as poverty, equity, health, etc. are of secondary interest.
  
• Due to pressure from critics, there has been some shift in the focus of the IMF and World Bank (although the solutions are fraught with new problems - see Appendix A: Poverty Reduction Strategy) but there is still an overwhelming reliance on using GDP growth to measure economic development.

ii. Input/discussion - Defining GNP and GDP (15 min.)

Tell participants that they have a handout (Handout 1: GNP & GDP) with the definitions so they don't have to worry about copying them. It also includes problems with using GDP growth as a measure of economic development.

Definitions: Macroeconomy, GNP and GDP

Macro means large, so the macroeconomy is the whole economy - and includes factors such as growth (of GDP or GNP), inflation, unemployment, interest rates, trade, national budgets, etc.

Micro means small, so the micro-economy refers to pieces of the economy. i.e. businesses, the labour market, worker preferences, etc.

GNP vs. GDP
You can think of GNP (Gross National Product) or GDP (Gross Domestic Product) as the amount of "stuff" - goods and services - that is produced.

The difference between GNP and GDP is a matter of the nationality of the producers and the location of production:

GNP = goods and services produced by Irish corporations in Ireland + goods and services produced by Irish corporations in other countries

GDP = goods and services produced by Irish corporations in Ireland + goods and services produced by foreign corporations in Ireland

You can think of these as measures of national output or income. GDP divided by the population would sometimes be referred to as per capita income.

Question for participants: Do you think GDP or GNP is bigger in the case of Ireland?

Answer: GDP in Ireland is substantially larger than GNP due to all the Transnational Corporations (TNCs) in Ireland. This is at odds with the rest of the EU and the U.S. where GDP and GNP are fairly close.

iii. Is GDP growth a good measure of economic development? (50 min.)

1. Brainstorm (15 min.)
Using a flipchart to record comments, brainstorm problems with measuring economic success or progress by GDP growth.

2. Small group exercise - Alternative Measures of Progress or Development (25 mins)
In small groups, construct your own measures or index of progress/development. What measurements/factors would you include? (15 mins)

Feedback: 10 mins

3. Input - The HDI, an alternative measure (10 min.)
There are many different measures or indices which emphasise different things such as the environment or women's rights. Women's rights groups have strongly advocated measuring the value of unpaid labour so that women's care work is no longer invisible. The UN now collects data on how people spend their time (time use studies) in order to get at this information.

One well known and easily available alternative index is the HDI:

Human Development Index also known as the HDI. This is calculated by using statistics on life expectancy, literacy, education, GDP/capita, etc. (Handout 2 - Human Development Index). These are published annually in the UN Human Development Reports - the website address is in the resource list.

Explain PPP = purchasing power parity to participants: PPP corrects for price differences between countries. For example, GDP converted into dollars may look too low to allow people to survive, but this may be deceptive if prices are really cheap.
Ask participants to look at the line for Ireland. What does the last column say about GDP and human development in Ireland?

iv. Small group exercise: The evidence regarding growth and development (30 mins)

Materials:

• Handout 3 - Long term pattern of economic growth and human development progress
  
• Handout 4 - Human Development Report 2000, Income and Poverty chart.

Clearly GDP alone is an inadequate measure of development, but is it still the central ingredient? In small groups, look at Handout 3 and Handout 4 (15 min.) and discuss the following questions.

• What conclusions could you draw about the connection between GDP growth and development?
  
• Can you draw any conclusions about what factors contribute to where (which quadrant) countries are located?

Big group discussion (15 min.)

v. Optional discussion question: Is Growth Necessary? Can we survive growth?

Question: Some argue that we need to achieve zero growth in order to achieve sustainability. What do you think?


C. Macro Economic policy (2 hours)

Objectives:

• To explain macro economic policy
  
• Targets of macro economic policy: the business cycle, growth, inflation vs unemployment
  
• Tools of macro economic policy: fiscal and monetary policy.

Materials: Flip chart, markers, blue tack

i. Input - Intro. to Macroeconomic Policy (30 min.)
The government uses macroeconomic policy (or macropolicy) to try to manage the economy. Capitalism goes through 'booms' and 'busts' - these are called business cycles. An active macropolicy tries to smooth out the business cycle by balancing growth, unemployment and inflation. Policies that reduce unemployment might lead to a rise in inflation, while keeping the lid on inflation may prevent growth in jobs. Thus there is often a political struggle over what is an acceptable level of inflation and what is an acceptable level of unemployment.

Now before we go any further into business cycles, we have to define inflation and real vs nominal prices.

1. Inflation, real vs nominal prices
Inflation is the percent change in the price level of a given basket of goods. The CPI (Consumer Price Index) is a widely used index that measures inflation for consumers. The CPI looks at the change in the price of a basket of goods that is meant to be reflective of what the consumer would buy.

Suppose the basket is comprised of bread, cheese and beer. If in 2001 it cost €10 and in 2002 it cost €11, then inflation rose by 10%. [(€11- €10)/€10]

Other indices for industry, or housing would use a different basket of goods for comparison.

Real prices = prices that have been adjusted for inflation
Nominal prices = prices that have not been adjusted.

Question:
Suppose you earn €20,000 in 2000 and €22,000 in 2001. How much has your nominal income has increased? Suppose inflation was 10% for that time period. What would your real income be?

Answer:
Your nominal income has increase by €2,000/€20,000 = 10%.
With inflation at 10%, your real income has remained the same since prices are 10% higher.

Now to return to the business cycle.

2. The Business Cycle and the Phillips curve
The solid line represents the economic booms and busts as measured by GDP growth. The dotted line represents a tamed business cycle in which the wild boom and bust cycle has been replaced by moderate ups and downs.

Business cycle graph

The Phillips curve below depicts the relationship between inflation and unemployment. Generally, they move in opposite directions.

Pt. A in both graphs is at the top of the boom. There is high growth and very low unemployment (in other words, close to full employment). Inflation tends to be high because 1) employers raise wages in order to attract workers who are in scarce supply 2) workers are emboldened to push for higher wages 3) businesses raise prices in response to strong consumer demand (all those folks with jobs and flush wallets).

Conversely, at Pt. B the economy is in a slump. Growth is low or even negative (ie. output is shrinking). Unemployment is very high and so workers are not buying. Inflation tends to be low as wages fall and businesses drop (or at least don't raise) their prices because they aren't selling all their stock.

Keynesian macropolicy shoots for Pt. C - moderate growth, moderate unemployment and moderate inflation. Keynesian macropolicy seeks to tame the business cycle (this is shown as the dotted line on the Business Cycle graph).

Neoliberal macropolicy is far more concerned about keeping inflation down, even at the expense of growth and employment.

[Note: to further explore why there has been a shift from Keynesian to neoliberal macroeconomic policies, and who are the winners and losers, see Module 3.]

The next section looks at the tools of macroeconomic policy: fiscal and monetary policy.

ii. Fiscal Policy (45 min.)

1. Input - Two tools of macro policy : Fiscal and monetary policy (5 min.)
Governments have two tools, fiscal and monetary policy, which are used to balance growth, inflation and unemployment by affecting aggregate demand (AD)[1] . Aggregate means total, so aggregate demand is the total demand in a country for goods and services. Fiscal policy affects AD through government expenditures or through tax changes. Monetary policy affects AD through the money supply and interest rates.

2. Small group exercise- Fiscal policy (40 min.)

Materials: Flipchart paper, one set of Macro-policy post-its for each small group.

Make up sets of Macro-policy post-its with the factors listed below (one per post-it). These will be used for the monetary policy exercise as well.

G (government spending) G (government spending T (taxes) T (taxes) M (money supply) M (money supply) interest rates interest rates investment investment employment employment AD (aggregate demand) AD (aggregate demand) inflation inflation

Demonstration (15 min.)

Explain that in the face of a recession, the government could use expansionary fiscal policy. Demonstrate this using a set of post-its and putting up the following sequence on a wall. Explain the sequence using the narrative provided below.

[1] There are four components of aggregate demand: AD = C + I + G + (X-M)

• I = investment. Business demand for goods and services. This is the most volatile component.
  
• C = consumption. Consumer demand for goods and services. This is the largest component.
  
• G = Government expenditures. Government demand for goods and services.
  
• X-M = exports minus imports = net exports (could be positive or negative).

Expansionary Fiscal policy
G or T AD investment employment AD investment employment AD and so on.

Narrative:
In the face of a recession, the government would use expansionary fiscal policy:

=>Raise government expenditures (G) or lower the taxes (T)

=>Aggregate demand (AD), or spending on goods and services, is raised either directly through higher government expenditures (G) or due to lower taxes (T) giving consumers more money to spend.

=>Business responds to the increased demand for their goods and services by increasing business investment.

=>As businesses invest more, they hire more workers, increasing employment.

=> There are now more workers with a paycheck and their spending creates an increase in AD for goods and services.

=>Businesses respond to the increased AD for their products by increasing business investment.

=>As businesses invest more, they hire more workers, increasing employment.

=>More workers with a paycheck and their spending creates an increase in AD for goods and services. Etc.

Now what is happening to inflation? Well, at some point, it is likely to rise as AD (spending) outstrips the aggregate (total) supply (AS) of goods and services. In other words, businesses can hardly keep up with orders and respond to the 'excess' demand by raising their prices. Employers may also be forced to raise wages in order to attract new workers and retain old workers, both of whom are spoiled for choice in the job market.

[2] Just in case you want more detail on the multiplier. Say the government gives you an extra £100. Let's assume in this example that everyone saves half and spends (consumes) half of the change in their income. An economist would say that people have a marginal propensity to consume (MPC) of ½. So you save £50 and spend (consume) $50 on new clothes. The clothing store owner takes the £50, saves £25 and spends £25 on a fancy haircut. The hairdresser takes the £25, save £12.50 and spends £12.50 on pottery. The potter takes the £12.50, saves half and spends £6.25 and so forth. The total expenditures (demand) that has been created is £100 + £50 +£25+£12.50+£6.25 + £3.12 + £1.56 + £.78 + .39 + … = £199.60. If you kept going you'd end up with £200.
It just so happens that the formula for the multiplier is 1/(1-MPC). The MPC in this example is ½ So the multiplier is 1/(1- ½ ) = 1 / ½ = 2 and if you multiply the initial change in Government spending by the multiplier you get: 100 x 2 = 200

Small group exercise (15 min.)
Now, take down the example. Break into small groups. You'll need a set of cards for each group.
Present the scenario below. Groups have 10 minutes to put together the fiscal policy response by arranging the post-its on a sheet of flipchart paper or on the wall.

Scenario: Imagine that inflation in Ireland is running above the target level of 2%. Use the cards to show what the government would do.

Have one small group present and explain their sequence.

They would also criticise expansionary fiscal policy because it generally means that the government has to go into debt to pay for the increase in expenditures or a tax cut. This is called deficit spending and is covered by the sale of government bonds (IOUs).

Supporters of conservative economics, because of their belief in minimal government, are generally opposed to increases in government spending, especially deficit spending, even if it is for the purpose of stimulating the economy. The irony is that these folks are happy enough with massive deficit spending for military purposes. So some of the biggest economic stimulus packages in history have been in the form of warfare.

The Economic and Monetary Union has restricted the ability of governments to use fiscal policy due to the limit on national deficits of 3% of GDP. This means that the government is limited in its ability to borrow for the purpose pursuing an expansionary fiscal policy. Conservatives argue that placing a limit on national deficits is good for economic growth and price stability.

Critics argue that government must be free to pursue expansionary fiscal policy in order to address problems of unemployment, inequality and poverty. They argue that the single-minded concern with inflation over unemployment hurts the vast majority of people.

Demonstration (15 min.)
Demonstrate expansionary monetary policy using a set of post-its:
M interest rates investment employment AD investment employment AD and so on.

Narrative: In the face of a recession and high unemployment, the central bank would use expansionary monetary policy to stimulate demand.

=> The central bank would expand the money supply (M)

=>This would bring down interest rates. You can think of the interest rate as the price of money. If the supply of money increases relative to the demand, the price (interest rate) falls.

=> The lower interest rates means that its cheaper to borrow money which stimulates business investment.

=> As businesses invest more, they hire more workers, increasing employment.

=> There are now more workers with a paycheck and their spending creates an increase in AD for goods and services.

=> Businesses respond to the increased AD for their products by increasing investment and employment.

=> This creates more AD and so on.

Small group exercise (15 min.)

Now, take down the example. Break into small groups. You'll need a set of cards for each group. Present the scenario below. The groups have 10 minutes to put together the monetary policy response by arranging the post-its on a sheet of flipchart paper or on the wall.

Scenario: Imagine that inflation in the Eurozone was running above the target level of 2%. Use the cards to show what the European Central Bank would do?

Have one small group present and explain their sequence.

Input/Summary

With the establishment of the Economic and Monetary Union, control over monetary policy has shifted from the central banks of Eurozone countries to the European Central Bank (ECB). The ECB has a mandate to keep inflation under 2%, while full employment is not a target of its monetary policy. On the contrary, the ECB is fixated on controlling inflation even at the expense of high rates of unemployment. This reflects the shift in economic ideology from Keynesianism to neoliberalism which is covered in greater detail in Module 3.

D. Action and reflection (30 min.)

Objectives:

• To provide an opportunity to reflect on and process what they've learned.
  
• To make links between the content of the workshop and their own lives and work.

Small group discussion - What am I taking away with me?

Put the following categories up on the wall:

• New concept - what new concepts, definitions, analysis did you learn?
  
  
• Eye-opener - what was startling, exciting, horrifying, etc.?
  
  
• Application in work - is there anything that you've learned that can be brought into, or is useful to your work?
  
  
• Application in personal life - is there anything that you could change in your life, for example, given the domination of TNCs you could try to stay away from the mega-stores, to buy local, etc.
  
  
• Other

Break into small groups, distibute flipchart paper and markers. Ask people to discuss what they are taking away with them from this workshop and to put their points in the categories above. (15 min.)

Reportbacks/discussion (15 min.)

E. Evaluation (15 min.)

Because some evaluation will have taken place in the exercise above, this may not take long. Ask participants to share any other comments. Things that they really liked, things they'd like to have seen changed. Check in with the hopes and fears to see if the hopes were largely realised and the fears allayed.

APPENDIX A

Poverty Reduction Strategy - Role play (1 hr. 10 min.)

Objectives:

• Think about a poverty reduction strategy for Ireland, including a domestic and an international dimension.
  
• Explore tensions and points of common interests between different interest groups.

Materials: Flip Chart paper, pens, blue tack, Handout 3 - Poverty and Inequality in Ireland.

Set-up (10 min.)
Have the questions below written up on the wall. Give a bit of background on the Poverty Reduction Strategy.

Assign the 7 roles to participants and then divide them into two groups as listed below. Distribute Handout 3 to participants
.
Group 1: women, unemployed/low income workers, trade unions, farmers.
Group 2: business, development organization, environmentalists.

Round 1 (35 min.)
Ask each group to Develop a Poverty Reduction Strategy (20 min.). Handout #3 - Poverty and Inequality in Ireland provides some background data. Each group will have 2-3 minutes to present their strategy. They should consider the following questions.

Reportbacks and discussion . Is there enough common ground to move forward? (15 min.)