"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

The Shameful Rate of Unemployment in the EMS 269
efficiently by first agreeing on an average inflation rate for the group, say p*
(however, it should now be a weighted average, weighted by GDP weights). Then
for any given country, say country j, inflation is programmed at p* + a j and the
a j , j = 1...n can be obtained by simultaneously solving n equations consisting
of the definition of p* above, and n - 1 equations of the form a 1 - a j = x j , and x j
is the desired differential between a reference country 1 and country j.
From the last section we know that to ensure for country j the rate of inflation
p j = p* + a j , we need to program a wage increase:
wj = pj + yj = p * i + ajt + yjt.
(8.4)
Thus we will end up with some differences within the group, not only in the rate
of inflation, but also in the rate of growth of nominal wages, arising from two
sources: differences in productivity and differences in the need to correct the real
exchange rate in order to increase competitiveness, net exports and employment.
Note that in the equation above, p must be interpreted as a measure of the change
in the price index of domestically produced commodities or more precisely, of
domestic value added, which is the GDP deflator. Thus (w - p) is a measure of
the change in real wages, but measured in terms of purchasing power over domestically
produced commodities, which in the stable mark-up model is always equal
to productivity growth. On the other hand, the change in the price of commodities
purchased, say P, rather than produced within the economy, can be approximated
by a weighted average of the rate of change of the GDP index and of the
price of imported commodities, say p f , weighted by the share of the two types of
commodities in the domestic basket, say D and 1 - D or:
f
P = D p + ( 1 -D ) p .
j j j j j
(8.5)
Then if we conveniently approximate the change in the price of imported commodities,
p f j, by p*, the average rate of inflation for the group, one can establish
the following result: the change in the real wage measured in terms of purchasing
power over commodities purchased is:
w - P = w - p + ( 1 -D) p* - p ,
j j j j j j
(8.6)
but w j - p j is productivity growth y j and p* - p j = a j , the differential rate of inflation
or increase in competitiveness. Thus, the increase in the real wage programmed
for country j turns out to be:
w - P = y + ( 1 -D ) a ,
j j j j j
( )
(8.7)
that is, it is equal to its productivity growth, plus the programmed relative appreciation,
multiplied by the import share.