Analisis Pendekatan IS-LM, Eksport Meningkatkan Pendapatan?

Our lives are extremely dependent on how well the economic system works and distributes its fruits to the member of the society. In an international perspective, the world economy is a complex structure linking nations and peoples in an ever-changing environment. How the economy works is a decisive question for understanding nations' physiology and pathology, first essential step to diagnosis and sanation.

Economic newspapers, official bodies' announcements, academic reflectionsdescribe processes, suggest interpretations, support policies and remedies. There you can find a burgeoning source of ideas in order to develop your own point of view.Questions may be:• how can growth be triggered when everything goes wrong?• what will be the effects of rising prices?• how will booming exports impact the households?

Appendix IS - LM

Dody Zulfikar SE MM, [email protected]

The IS-LM model relies on positive and negative relationships between macroeconomic variables. In order to describe the subsequent changes provoked by an initial shock, you just read the graph representation, following the arrows. You formally do not need to know the reason why two variables go in the same or in the opposite direction. The formal model and its graph representation works without justifications.

Still, to economically understand what is happening, it is useful to know the justifications, also in order to judge the strength and the speed of the relationship.

Dody Zulfikar SE MM, [email protected]

Arrows express an influence of the first variable on the

second one.

A sign "+" means that the change in the first variable provokes a change in the

same direction for the second ("an increase give

rise to an increment").

By contrast, a sign "-" shows that the change in

the second variable will be in the opposite direction

("a fall in.. will increase ..").

IS - LM

Dody Zulfikar SE MM, [email protected] Zulfikar SE MM, [email protected]

The RulesVariables, as consumption or exports, are put in rectangular frames. To reader's friendliness, variables are in full names, not abbreviations or math symbols.

Links between variables are expressed through oriented arrows, with changes in the first variable having an impact on the second. A sign "+" means that the change in the first variable provokes a change in the same direction for the second ("an increase give rise to an increment", "higher ... give rise to higher ...").

By contrast, a sign "-" shows that the change in the second variable will be in the opposite direction ("a fall in the employment will increase unemployment").

An increase of the first variable will eventually provokes a fall of the third, after producing a rise in the second.

Dody Zulfikar SE MM, [email protected]

Export Led Growth

The rise of real interest rate is a turning point.

Dody Zulfikar SE MM, [email protected]

Export Led Growth - The rise of real interest rate is a turning point.

Thus, expansionary monetary policy risks to provoke inflation and a further need for money supply expansion.

Export Led GrowthOther things equal, an increase of export will trigger an increase of income.

an increase of consumption, since households are richer. Consumption growth, in turn, implies a further increase of income (Keynesian multiplier);

The growing income helps the households, by increasing their savings;

The growing income helps the State, by widening the tax base, thus the tax revenue. At normal levels of public expenditure, this means a reduced deficit or even a surplus for the State budget;

it increases imports

it also produces an increase of the real interest rate, given a fixed real money supply, which in turn depends on a deliberate choice of the central bank not to increase the nominal money supply (not to print money, not to allow more credit from banks to the economy).

Prolonged GDP growth boost employment, as we said, and this reduces unemployment.To the extent wages are dependent on unemployment, they will rise as well, increasing the cost of production. This will exert a pressure on firms to rise prices - both in competitive and monopolized markets. Inflation becomes a real risk.

If the central bank acts and keep the interest rate under control, everybody is happy: investment stay at the same level so as the exchange rate, leaving room for export to continue their growth.

The rise of real interest rate depresses investment, which in turn brakes the income growth.

The increase in the real interest rate has the further effect of increasing the nominal exchange rate, by attracting foreign capital. Thus the real exchange rate rise as well. With stronger domestic currency, not only imports will further rise but also the exports will be restrained.

Export Led Growth

The increase of price level reduces the real money supply: by definition the latter is nominal money supply divided by price level.Unless the central bank further increases the nominal money supply, the real interest rate will rise, with all its unpleasantconsequences on export and investment.

Unfortunately, the price level increase is already braking exports by strengthening the real exchange rate, given a stable worldprice level.In other words, inflation is damaging exports by increasing the price of domestic goods in foreign terms, even in the event of afixed nominal exchange rate or an expansion of money supply that keep the real interest rate stable.

If price level is extremely responsive to unemployment, then the task of the central bank is very difficult, since the export-led growth is in danger from different points of attack.

In synthesis, an export-led growth is possible but it requires a careful policy of control in side effects that can menace to erode the basis of the same spurring element: exports.

Crucial is the responsiveness of the variables to changes in the other values. If investment is not really influenced by the interest rate (either exports by the exchange rate), the export-led growth is clearly easier to manage.

Dody Zulfikar SE MM, [email protected]

Looking again at the graph, the export-led growth will be stronger and more sustainable:i) the larger the share of exports on GDP;ii) the stronger the Keynesian multiplier;iii) the less the interest rate reacts to income;iv) the less the exchange rate reacts to the interest rate;v) the less investment reacts to the interest rate;vi) the less exports are responsive to exchange rate;vii) the less are wages are responsive to unemployment;viii) the less prices are responsive to wages;ix) the less imports are responsive to income.

We started our story from an increase of exports. But what could have provoked it?A first answer would be a growing foreign GDP with the widening foreign imports it implies. Another would be the opening of new markets for domestic goods abroad, due to marketing efforts of exporters. Furthermore, it is possible that the export dynamics is the target of conscious economic policies.To the extent export-led growth is strong, a careful fiscal policy promoting export may be a cute move, since tax revenue will rise throughout the growth.Alternatevely , a pre-emptive expansionary policy by the central bank could provoke an export increase through international price competitiveness of the country, improved by a devaluation, prompted by the fall of interest rate, due in turn to the increase in nominal (and real) money supply decided by the central bank.

Dody Zulfikar SE MM, [email protected]

Tq.

In short, an export-led growth can be triggered by external and internal reasons, accompanied and braked by internal conditions. As an alternative to export-led growth, domestic pulled growth has been proposed as having several advantages in this paper.