Name : Muhammad Reza Adi Wibowo

Class : EMBA 62
NIM : 29119375

MM5006 - Assignment Week 5B

1. Draw a diagram of the phases of a business cycle and label each phase. What is the
precise definition of a recession? An expansion?

Recession is a macroeconomics term/part of business cycle that refers to a significant

decline in general economic activity in a designed region. It had been typically
recognized as two consecutive quarters of economic decline, as reflected by GDP in
conjunction with monthly indicators like a rise in unemployment etc. However, The
NBER (National Bureau of Economic Research) defines a recession as a significant
decline in economic activity spread across the economy, lasting more than a few
months, normally visible in real GDP, real Income, employment, industrial production
and wholesale-retail sales.

And then, Expansion is the phase of the business cycle where real GDP grows for two
or more consecutive quarters, moving from a trough to a peak. This is typically
accompanied by a rise in employment, consumer confidence, and equity markets.

Regarding the business cycle diagram, shown on the picture above. There are few points
about the business cycle that I’d like to explain on the list below.
 a. Expansion

The first stage is expansion. When it occurs, there is an increase in employment, incomes,
production and sales/demand. People generally pay debts on time. The economy has a
steady flow in the money supply and investment is booming.

b. Peak

The second stage is a peak, when the economy hits a snag, having reached the maximum
level of growth. Prices hit their highest level, and economic indicators stop growing.
Many people start to restructure as the economy’s growth starts to reverse.

c. Recession

After peak, economy usually goes down. These are period of contraction/recession.
During this period, unemployment rises, production slow down, sales start to drop
because of a decline in demand, and incomes become stagnant or decline.

d. Depression

Economic continue to drop while unemployment rises and productions plummets. In the
other hand, recession keep occur in few consecutives quarters. Consumers and businesses
find it hard a secure credit, trade is reduced, and bankruptcies start to increase. Consumer
confidence and investments level also drop.

e. Trough

This period marks the end of the depression. Unemployment, demand drop etc already
reached its number. Then it start to going up again, to recover it’s cycle.

f. Recovery

In this stage, the economy starts to turn around. Low prices spur an increase in demand,
employment and production start to rise and lenders start to open up their credit coffers.
This stage marks the end of one business cycle.

2. The government is contemplating legalizing, and then taxing crack cocaine. Would the
government prefer that the demand for crack be elastic or inelastic? Explain, using
supply and demand diagrams.

Government has chosen to legalized the cocaine means that the Government wants to
control the cocaine trades and gain profits from it. However, they don’t want the
cocaine sold highly in the market so that demand is rising sharply which makes harder
for them to control. There are two possibilities for government. First, they could gain
much profits from taxes and regulations if we assume that the demand for cocaine is
inelastic. An inelastic demand or supply curve is one where a given percentage change
in price will cause a smaller percentage change in quantity demanded or supplied. The
market price of crack cocaine would increase from P to Pt and shift the supply curve
from S and St as quantity demanded of crack cocaine decreases but only slightly from
Q to Qt. Therefore, even though the price of cocaine is increase, supplier will not
discourage to supply cocaine.

Inelastic Demand

Δ𝑄
<1
Δ𝑃

But the effect of this inelastic demand would increase the consumption of the product
which government need to have attention too. Limitation and strict regulation could be
the solution.

In the other hand, if government concern to decrease the consumption of the cocaine.
Government would prefer to make the demand elastic. Elastic demand is when price or
other factors have a big effect on the quantity consumers want to buy. If a good or
service has elastic demand, it means consumers will do a lot of comparison shopping.
They do this when they aren't desperate to have it or they don't need it every day. They'll
also comparison shop when there are a lot of other similar choices

Elastic Demand

Δ𝑄
>1
Δ𝑃
The market price of crack cocaine would increase from P to Pt and shift the supply curve from S
and St as quantity demanded of crack cocaine decreases a lot from Q to Qt. Therefore, this condition
could make supplier discourage to supply more cocaine.

3. In calculating GDP by the expenditure method, there are two ways to avoid the double
counting of intermediate goods. Demonstrate your understanding of these two methods
by showing how both produce the same calculation of contribution to GDP. Assume
the following: 1) Iron ore is produced by iron mining, which is sold to steel makers for
$30 million (we will make the simplifying assumption that iron mining uses no
intermediate goods). 2) The iron ore is all used to make steel, which is sold to
automobile makers for $100 million. 3) The steel is all used to make automobiles, which
are sold to dealers for $250 million. 4) All of the automobiles are sold by the dealers to
consumers for $350 million. What are the two methods, and what contribution to GDP
can be calculated by each method, from the above assumptions?

A. Calculate the GDP by looking the final sales

By this method, GDP can be calculated directly from the final user/consumer.
Basically the ore to steel then become automobiles are sold by the car dealers for
$350 Million. Then the GDP is the same as final seller sold with $350 Million.

B. Calculate the GDP based on the Value Added

Capital/Intermediate Value of Value

Processes
Goods Sales Added
Mining - 30 30
Steel Making 30 100 70
Manufacture 100 250 150
Dealers 250 350 100
Total 380 730 350

Based on value adding calculation, founded total GDP also $350 Million.
4. Calculate the contribution to GDP that would be the result of each of the following
transactions:
(a) The government purchases an airplane for $6 million.
(b) A citizen sells a used car for $6,000.
(c) A citizen sells a used car to a dealer for $6,000, who resells it to a consumer for
$7,500.
(d) A citizen sells a bond for $1,000 that they bought last year for $600.
(e) The government issues a social security check for $1,250 (ignore the administrative
costs of issuing the check).

Answer:

First of all, GDP is calculated by sum up few points as shown on detail below;

GDP = C + I + G + (X – M)
C = Consumption
I = Investment
G = Government Purchase/Spending
(X-M) = Net Export

(a) The government purchases an airplane for $6 million.

This transaction would result to adding some amount to GDP, this action is included in
government spending. It will add the value of GDP.

(b) A citizen sells a used car for $6,000.

This transaction will not include or add the value of GDP. Because there is no additional
value on transaction used car. The value of the car is already calculated before. No
value added in GDP.

(c) A citizen sells a used car to a dealer for $6,000, who resells it to a consumer for
$7,500.

From this case, we assume that the used car has something new that adding the value
of the car (Can be new machine, new dashboard, new velg or any other modifications).
If we look after this, we can included the gap between the prices of the buy and price
of the sales which is $1500. The money will be added as a value added in the car. We
calculate the GDP by considering this also.

(d) A citizen sells a bond for $1,000 that they bought last year for $600.

no contribution of GDP ($0) in this transaction since there are only 4 aspect that can
give contribution which are consumption, investment, government purchase, and net
export.
(e) The government issues a social security check for $1,250 (ignore the administrative
costs of issuing the check).

This activity is not included in GDP, since there is no product associated. Also the
budget that spend by government is included in an economy package. So there is no
contribution to GDP.