Economics Part A 1

Economics Assignment Part A

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Economics Part A 2

Contents
Question 1: .............................................................................................................................................. 3 Question 2: .............................................................................................................................................. 6 Question 3: .............................................................................................................................................. 9 Question 4: ............................................................................................................................................ 11 References: ........................................................................................................................................... 12

Economics Part A 3

Question 1:
a)

Strong jobs figures put rate cut in doubt

Expectations of a May interest rate cut have been undermined by signs that Australia's jobs market is healthier than previously thought. More than 44,000 jobs were created across the nation in March, the Australian Bureau of Statistics said on Thursday, keeping the unemployment rate steady at 5.2 per cent once population growth was factored in. That was well above economists' expectations that 5,000 jobs would have been added to the economy for the month and marked a sharp turnaround from February when more than 15,000 jobs were lost. Economists are divided over how the better-than-expected data will affect the chances of an interest rate cut in May. The Reserve Bank of Australia opted to keep the cash rate on hold at 4.25 per cent in April but flagged a likely rate cut next month. While noting that the economy was underperforming, which suggests a lower cash rate is needed, the RBA indicated it would only cut the rate if consumer price index (CPI) data, to be released later this month, showed underlying inflation remained subdued. However, some economists warn the latest jobs data could undermine the case for a rate cut. RBC senior economist Su-Lin Ong said the data could help ease pressure on the RBA.

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"A number like this probably provides the market with a reminder that rate cuts aren't a done deal," she said. Nomura rates strategist Martin Whetton agreed. "On the basis of this data, we wouldn't expect that the RBA would find slack in the economy that's going to lead through to lower inflation," he said. However, HSBC Australia chief economist Paul Bloxham believed the RBA would be more interested in inflation data than the unemployment rate. "I think if the CPI numbers are low enough, the RBA will still feel that they can cut rates from here," Mr Bloxham said. (Evan Schwarten, AAP, The West; April 12, 2012) i) There is increase in employment in the last one month which might help in putting

hold to rate cut by Reserve Bank of Australia. There are positive signs in Australian job market with increase in 44000 employed people showing signs of recovery and better production levels. This will also increase private consumption giving rise to increased demand. This story deals with various macroeconomic questions from unemployment rate, inflation, production, labour, interest rate policies, money flow in the economy etc. ii) This news article describes tradeoffs between interest rate cuts, inflation rate and

unemployment rate. iii) First of all, this news article discusses the strong revival in the Australian job market

seen in the month of March. More than 44000 jobs were created in the month of March across the nation which showed great signs of growth and production. It also says that unemployment rate is steady at the rate of 5.2 percent.

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The increase in number of jobs surpassed all the expectations of economists which estimated it to be 5000 in the month due to 15000 lost jobs in the month of February. Economists now estimate that due to strong job market and higher production levels, Reserve Bank of Australia (RBA) may undermine expected interest rate cuts. It had managed to keep cash rate at 4.25 percent but hinted at possible rate cuts in the month of May. There are no signs that economy is underperforming but RBA would decide on possible rate cuts only after release of CPI data later this month. If inflation rates are under control, then only RBA will implement rate cuts. (Alfredo Saad-Filho; 2000) Overall, economy is showing positive signs of growth with higher production levels due to increased number of jobs. This will in turn increase private consumption increasing inflation and it will force RBA to hold rate cut or to increase interest rates. With the increase in jobs and higher production, wage rates are expected to be on the higher side. (Christine D. Reid; 2003)

b) i) As shown in the graph, the PPF curve of this country is a straight PPF curve where we

have constant opportunity cost for producing one unit of other commodity in comparison. The opportunity cost of 100 kg of food per month is same as that of production of sunscreen of 50 ltrs. a month. Which turns out to be as, opportunity cost of 1 kg of food is 0.5 ltrs. of sunscreen or opportunity cost of 1 ltr. of sunscreen is 2 kgs of food per month. Therefore, country can sacrifice 1 ltr. of sunscreen for every 2 Kgs of food a month or 1 kg of food for every 0.5 ltrs. of sunscreen.

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ii)

As seen from the graph, it is a case of straight PPF with slope of -0.5. Therefore, if the

country produces 150 kgs of food per month, it must produce 75 litres of sunscreen to achieve production efficiency. iii) Opportunity cost of producing 1 Kg of food is 0.5 ltrs. of sunscreen as calculated from

the slope of the PPF line. Also, opportunity cost of producing 1 ltr. of sunscreen is 2 Kgs of food which we have to compensate for producing 1 unit of sunscreen in a month.

Question 2:
a) i) Items Wages Consumption Taxes Transfer Payments Profits Investment Government Expenditure Exports Saving Imports Billions of Pounds 685 791 394 267 273 209 267 322 38 366

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We have formula for GDP by expenditure method as: GDP = C + I + G + (X-M) Where C = Consumption expenditure I = Investments G = Government Expenditure X = Exports M = Imports Therefore, in this example, GDP of UK in 2005 = 791 + 209 + 267 + (322 366) = 1223 pounds ii) In expenditure approach, it is assumed that whatever is produced is consumed by

someone. Therefore, measuring expenditure of money used to buy things is a way of measuring actual production taking place in manufacturing plants or service outlets. This approach is called as GDP by expenditure method. We also have other approaches to calculate GDP of a country like income approach or product approach. In income approach, we sum total income of all the individuals living in a particular country in last one year to estimate GDP, whereas product approach considers market value of all the final products and services sold in market to come at exact figures of GDP. (Farzad Farsio, Stacey Quade; 2003) In expenditure approach, GDP is calculated by an equation: Y=C+I+G+(XM) Where Y = GDP

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C = Consumption expenditure which is generally the largest component of GDP. All the personal or individual expenditures fall under this category like clothing, food, rent, jewellery, healthcare and personal care, medicines etc. I = Investment, which includes all the business investments in building, buying or acquiring long term assets. For e.g. purchase of machinery, software, hardware, etc. G = Government spending, which is the sum of all the expenses incurred by government of final goods and services in last one year. It includes investments in infrastructure, salaries of government employees, military expenditures etc. X = Exports, it is the monetary value of gross exports of a country in last one year I = Imports, it is the monetary value of gross imports of a country in last one year b) i) Quantities Bananas Coconuts Prices Bananas Coconuts 2008 800 400 2008 $2 $10 2009 900 500 2009 $4 $5

Nominal GDP2008 = (Quantity*Price)bananas in 2008 + (Quantity*Price)Coconuts in 2008 = 800*2 + 400*10 = $5600

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Nominal GDP2009 = (Quantity*Price)bananas in 2009 + (Quantity*Price)Coconuts in 2009 = 900*4 + 500*5 = $6100 ii) Real GDP2009 = Quantity of Bananas in 2009*Price of Bananas in 2008 + Quantity of

Coconuts in 2009*Price of Coconuts in 2008 = 900*2 + 500*10 = $6800

Question 3:
a) i) We have formula for Unemployment rate as percentage of unemployed workers to

that of total workforce. Unemployment Rate = Unemployed Workers / Total Labour Force Unemployment Rate2008 = 80200/(1560800+80200) = 4.88% Unemployment Rate2009 = 95400/(1601000+95400) = 5.62% ii) The labour force participation rate is defined as ratio of total labour force to that of

total population of the same age range. Labour force participation rates were 67% and 67.5% in January 2008 and January 2009 respectively. Labour force participation rate = Labour force / Total working age population

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Therefore, Working age population2008 = 1641000/0.67 = 2449754 Working age population2009 = 1696400/0.675 = 2513185 iii) Employment to working age population ratio2008 = 1560800/2449754 = 0.6371

Employment to working age population ratio2009 = 1601000/2513185 = 0.637 iv) As we can see from the above ratios, there was increase in working age population of

Queensland during 2008 up to the extent of around 60000 people. While new employment ratio suggest that only 40000 new jobs were provided which led to increase in unemployment rate during 2008. At the start of 2009, the unemployment ratio reached to 5.62% which is a rise of 13% from previous year. (Pietro F. Peretto; 2012) b) i) If Thailand imposes legal restrictions to crack down on illegal immigrants, then illegal

immigrants have to leave Thailand and it loses many of the cheap labour available in many sectors. Wage rates go high and potential GDP goes down. ii) As lot of illegal immigrants leave the country, there are many vacant places or jobs

which were previously done by immigrants. Therefore, general employment level goes high at such a stage. iii) As there occurs shortage of labour forces due to returning of illegal immigrants,

supply of labour decreases which leads to increase in wage rates. iv) In countries where these immigrants return, potential GDP increases due to higher

productivity of labour and easy access to labour pool.

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v)

Employment rates go down, as supply of labour increases giving rise to easy access to

cheap labour. vi) Wage rates decrease as there is additional supply of labour and demand is same,

shifting the equilibrium to lower wage rates.

Question 4:
a) i) If the government has the budget surplus of $1 trillion then national savings increases

by $1 trillion which in turn increases the supply of loanable funds by $1 trillion shifting the supply curve to right side by $1 trillion. This result in new equilibrium point with demand and supply equals to $7.25 trillion and interest rate equals to 6.5%. It does not result in crowding out as government has excess funds. ii) If the government has the budget deficit of $1 trillion then national savings decreases

by $1 trillion which in turn decreases the supply of loanable funds by $1 trillion shifting the supply curve to left side by $1 trillion. This result in new equilibrium point with demand and supply equals to $6.75 trillion and interest rate equals to 7.5%. It results in crowding out as government borrows to finance its deficit leaving lesser funds for investment. iii) When Ricardo-Barro effect occurs, people anticipate higher taxes in future due to

budget deficit. Hence they save more, giving rise to increase in loanable funds and thus overall, interest rates fall instead of increasing and private saving increases. Interest rates are higher than equilibrium rate of 7%. b)

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i) Tractor parts are unlikely to be used as money because they are not portable and cannot be exchanged with others too easily. ii) Packets of cigarettes can be used as a commodity for substitute of cruzeiro because it can be exchanged easily; it is durable and can be stored easily. iii) Loaves of bread are light and can be exchanged easily but cannot be stored for too long. They also spoil too rapidly and hence cannot be used as substitute for cruzeiro. iv) Impressionist Paintings cannot be used as a substitute of cruzeiro because it is not portable and cannot be exchanged too easily. Also quality of painting and its value differ drastically from artist to artist.

References:
Alfredo Saad-Filho (2000), Inflation theory: A critical literature review and a new research agenda, in Paul Zarembka (ed.) Value, Capitalist Dynamics and Money (Research in Political Economy, Volume 18), Emerald Group Publishing Limited, pp.335-362 Christine D. Reid, (2003) "An Encyclopedia of Macroeconomics", Reference Reviews, Vol. 17 Iss: 7, pp.20 20 Farzad Farsio, Stacey Quade, (2003) "An Empirical Analysis of the Relationship Between GDP and Unemployment", Humanomics, Vol. 19 Iss: 3, pp.1 - 6 Pietro F. Peretto (2012), Chapter 19 Market Power, Growth, and Unemployment, in Olivier de La Grandville (ed.) Economic Growth and Development (Frontiers of Economics and Globalization, Volume 11), Emerald Group Publishing Limited, pp.493-525