[MUSIC] We've seen then how exchange rate policy can also influence the economy, and how It can lead policy makers into sort of contradictions, as they try to decide what to do. There's a fourth policy. We mention fiscal, monetary, exchange rate and structural. Structural policy is a very big one. It's kind of hard to define. It doesn't work nearly in the same way as the others. Structural policy is. All of those changes that can be made in the legal structure, the bureaucratic structure, the relationships in the economy [SOUND] that influence the way it works. Now, structure or forms of term is very politically charge because a lot of the time it's been used by the IMF [UNKNOWN] Governments that are looking for, you know, a much more free market environment and they're kind of attacking unions or, whatever. So sometimes the term carries a lot of political weight with it. But in general, if we're talking about the government influencing the economy it's important to consider structural reform Because structural reform affects the supply side of the economy, the aggregate supply curve of the economy. And that makes it really different from all of the policies we've talked about so far. You notice that since we started with fiscal policy, we haven't referred to the supply curve, it's just inert there, right? Sloping upward on our aggregate supply route demand diagram. And the other, all the policies we've looked at, fiscal, monetary, exchange rate, they move the aggregate demand curve. But what about that aggregate supply curve? Is it really inert? Does it just sit there? Well no it doesn't. The aggregate supply curve, as we talked about in an early session. Does shift as well, and it mainly shifts when production costs change. Any kind of production cost. It can be the cost of energy, it can be the cost of paying taxes. It can be the cost of financing. And it can also be just the cost of complying with government regulations. So, the aggregate supply curve is moved By structural changes in the economy. Let's imagine for instance that we're in France, year 2000, and the government decides that workers need to work 35 hours a week instead of 40, and that it, passes a law saying that companies need to have their workers work only 35 hours but pay them the same amount. Now, this is something that actually happened, alright. What would happen to our aggregate supply aggregate demand diagram? Well think about it a minute. Companies find themselves with increased production cost, don't they? Because suddenly fewer hours work cost them the same money as more hours of work used to. So if we look at our aggregate supply and aggregate supply diagram, the aggregate supply curve is going to shift inward to the left. All right because the cost of producing the same amount of stuff has suddenly risen. Well, what happens then to the economy? If you draw this graph and you think about. How inflation goes up and down on your vertical axis, and how unemployment and GDP move on your horizontal axis. You see that when agrid supply moves left, your new equilibrium will give you less GDP, higher unemployment, and higher inflation, okay? So this is a situation we refer to as Stagflation. Here what we have is, we have a legal change in the economy, that caused aggregate supply to shift to the left, and therefore, it caused the economy to suffer from stagflation. So, what we find are a lot of different rules and policies and changes in an economy. Will effect agrid supply. Their adopted for a particular reason, the 35 hour week may have been a rational thing to do. It makes sense. With our income being so high that we should actually work less and be able to enjoy our income. But the effect of the policy was to shift agrid supply to the left because it raised production cost for companies and therefor pushed the economy into a situation with rising inflation. And rising unemployment at the same time. What can we do about these situations? Well, again, this is why the term structural reform is politically charged. Often people will say, we need to make it cheaper and easier for companies to do business so that the aggregate supply curve moves outward to the right. Okay? Again, working with your diagram, you can see if you move aggregate supply outward to the right instead of inward to the left. Look at your new equilibrium. You've got more GDP, less unemployment, on your horizontal axis, and less inflation on your vertical axis. It's the best of all possible worlds, right? Less inflation, more output, less unemployment. Everything's going well. So, with structural form, what governments will usually try to do is they'll try to do something to make it easier for companies to do business. So that aggregate supply will shift to the right. What are these things they can do? Well, some of them don't look very prosocial. So, for example, maybe you will Keep the minimum wage from rising for eight years, so is something that happened under the Reagan administration. So you just don't raise the minimum wage. That means that production costs are lower for companies, and their average supply curve over time will move out to the right. And you get more growth and less inflation, or maybe you can deregulate the economy. So that companies don't have so many bureaucratic costs. If you think about something like [SOUND] environmental policies. Pro environmental policies. We require companies to To be more careful with the environment. To observe certain standards on waste, or on pollution or whatever it is. These are, hugely desirable for the economy. They're very much needed. However, what they do is they raise the cost of doing business. So, the agrid supply curve will inward to the left and this could cause sort of a supply shock, if it were big enough, or sort of stagflation situation. So if a government is saying, we need to dere, deregulate, we move that aggregate supply curve out to the right. Improve the economy, how do we deregulate? Well, let's lift the environmental standards, right? Or let's not adopt them. I'm not promoting this. Obviously, I think we need the environmental standards. I'm just saying, the movement of the curve would be in a direction we would like. So maybe, you know, throw out rules like Black Economic Empowerment in South Africa. Move their curve out to the right. We have a social reason for the policy, but if you want to really just deregulate, and move active supply out. You would say throw these policies out the window. [SOUND] There are other very positive things you can do. Simply bureaucracy. Is expensive, and often bureaucracy doesn't benefit hardly anybody you know, who is benefited when a company has to go through 15 different procedures to be created right so, sometimes these policies are easy to change and there not so politically charged you could say alright I'm going to have a single window as the UK does or Canada does. I have a single window where you go and you can do everything to create the business in one day. It doesn't hurt many people it's not you know something that hurts the environment or, or stops us from promoting equality or ending discrimination and it can move that aggregate supply curve out to the right. So, this is another policy option that governments have in different situations to move the economy. We should be aware that structural reform is, can be very slow and somewhat unpredictable, okay? It may take a long time. I change something in the economy. I liberalize the labor market. It might take a couple of years before that actually reduces production costs for companies, the average supply curve moves out, and we start to see lower inflation and more growth. So, it can be slow, it can be unpredictable, it can be politically charged. It can reverse policies that are desirable for your economy, maybe, such as environmental protection or equality of opportunity. It is however, very relevant because when we think about certain countries, think about the countries that are in the Euro zone, alright. The countries that share a currency and share a central bank. We've got four policies don't we, monetary, fiscal, exchange rate and structural. Well, these countries have given up their monetary policy because a European Central Bank controls their interest rates and their, and their monetary policy. They've also given up an exchange rate policy because they no longer have a separate currency. Spain shares a currency with Germany. Right so, they can't say, we're going to drop the value of our currency. Okay? And sometimes, they can't use fiscal policy very much, because of something we're going to be talking about soon, which is austerity rules. Reduce that budget deficit, reduce that debt, and so in situations like this they made be left with only. Structural policy to try to get the economy moving again. Or maybe look at a developing country that has a very high foreign debt. Alright, and so it's got problems with using both monetary policy and exchange rate policy because imagine that, that debt we know technically foreign debt is in a foreign currency alright, imagine that debt is large. And we know that if our currency falls in value. The size of that debt in that local currency goes up. We end up with a much bigger indebtedness problem. So we can't really use monetary policy to stimulate the economy. because if we cut interest rates to raise investment rates GDP. Will also decrease the value of our currency, increase the size of our foreign debt. So what can this country do to stimulate their economy? Well, they don't want to raise their indebtedness, they don't want to play too much with monetary policy because the foreign debt may go up. So, they may be only left with structural form too, to move the economy. And the truth is that, deregulation understood in its right sense, not just let everybody do what they want because the economy definitely needs regulations, but going through our regulations and finding out what really is good and useful, and what's unnecessary and causes costs that are not justified by the benefits of the regulation. If we deregulate in that way, going towards more rational regulations, this can set in motion a process of shifting out where the aggregate supply curve and get the economy moving again with lower inflation, higher GDP, less unemployment in situations where you really don't have the freedom to use your other tools [MUSIC] [BLANK_AUDIO]
