1ECONOMICS ASSIGNMENT Table of Contents Answer 1....................................................................................................................................2 Answer 2....................................................................................................................................4 a. Tariff of 30% on Australian chickpeas in India.................................................................5 b. Increase in demand for Australian wine in China..............................................................6 c. Increase in government expenditure...................................................................................6 d. Fall in price of imported oil...............................................................................................7 e. Increase in immigration......................................................................................................9 References................................................................................................................................11
2ECONOMICS ASSIGNMENT Answer 1 Inthetheoreticalandconceptualframeworkofeconomics,thereareseveral macroeconomic indicators like that of growth of the Gross Domestic Product, rate of inflation, unemployment rate and others, the performance and dynamics in which have considerable impacts on the economic performance of the concerned countries (Mankiw, 2014). The rate of inflation in a country at a particular point of time shows the average level of prices of the commodities and services in the country at that point of time. A very high inflation, thus, implies that the goods and services are quite costly in the country, which in turn indicates towards higher sufferings for the population of the country. On the other hand, a very low inflation rate indicates towards low prices of commodities which in turn indicates lack of encouragement for productivity and may lead to economic stagnation in the country (Goodwin et al., 2015). Thus, maintaining a moderate and balanced level of inflation is an important task of the monetary authority of the countries. On the other hand, high rate of unemployment is heavily detrimental for the economies as it signifies lack of economic welfare among the population in the country, which in turn indicates towards lack of productivity and sluggish economic growth of the country. Keeping the significance of these two macroeconomic indicators into account, the dynamics of the same and the relationship between the dynamics of the two indicators, for the globally dominant, highly developed and one of the most stable economies of Australia can be seen from the following figure:
3ECONOMICS ASSIGNMENT 44.555.566.57 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Rate of Unemployment and Inflation (2001-2016) Unemployment Rate Inflation rate Figure 1: Rate of Unemployment and Rate of Inflation in Australia (2001-2016) (Source: Abs.gov.au, 2018) As is evident from the above figure, there has been considerable fluctuations in the inflation and unemployment rates of the country in the period of 2001 and 2016. But when the trend of the relationship between these two variables is observed over the same period, it can be seen that there exists a visibly negative relation between the rate of inflation and unemployment rate of the country as can be seen from the negatively sloped trend line (Corden, 2012). This can be theoretically augmented with the concept of Phillip’s curve in economics. Phillip’s Curve The Phillip’s Curve shows the relationship between the inflation and unemployment rate of a country and is generally negatively slopes as can be seen from the following figure:
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4ECONOMICS ASSIGNMENT Figure 2: Phillip’s Curve (Source: Gordon, 2013) This argues that when the unemployment is low in a country, that is when the employment is high, the economic welfare and the purchasing power of people are also high, which increases the demand in the economy, thereby raising the price levels of goods and services, implying a higher inflation rate and vice versa. This can be seen to be practically applicable in case of the economy of Australia between 2001 and 2016. Answer 2 The movement of the Real GDP and the overall price levels in a country can be explainedwiththehelpoftheAggregateDemandandAggregateSupplyModelof macroeconomics, which determines the equilibrium level of GDP and price levels by the interaction of the overall demand and supply dynamics in a country (Rao, 2016). The Aggregate Demand consist of the consumption expenditure (C), the investment expenditure (I), the total expenditure of the government of the country (G) and the Net export
5ECONOMICS ASSIGNMENT balance (export – import) of the country and an increase in any of these increases the aggregate demand. At the equilibrium condition of the model, the aggregate demand equates the aggregate supply in the economy. a. Tariff of 30% on Australian chickpeas in India The imposition of tariff implies an increase in the price of Australian chickpeas in India, which in turn indicates towards a fall in the demand of the same. Thus, the export of Australia falls, which in turn reduces the income inflow in terms of reduction of net exports. This in turn reduces the aggregate demand in the country itself, the effects of which can be shown as follows: Figure 3: Fall of Australian exports (Source: As created by the author) Due to the fall in the aggregate demand, aggregate supply remaining the same, both the overall price levels as well as the Real GDP of the country falls as can be seen from the above figure, where P denotes the price level and Y denotes the Real GDP.
6ECONOMICS ASSIGNMENT b. Increase in demand for Australian wine in China The increase in the demand for wine in China implies increase in the export of the same from Australia which in turn implies that the net exports of the country increases thereby implying that the income inflow increases which in turn increases the aggregate demand in the country: Figure 4: Increase in export of Australian wine (Source: As created by the author) This in turn increases both the price and quantity of commodities and services consumed thereby increasing the Real GDP of the country. c. Increase in government expenditure The increase in the government spending for more electric power capacity generation implies the increase in (G), which in turn increases the aggregate demand, the effects being same in the country:
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7ECONOMICS ASSIGNMENT Figure 5: Increase in government expenditure (Source: As created by the author) The price levels as well as the real GDP of the country increase. d. Fall in price of imported oil On one hand the fall in the price of imported oil leads to an increase in the value of net exports, thereby increasing net exports (Galí, 2013). On the other hand, oil being one important component of any industrial production, the cost of production decreases, thereby increasing supply. The result can be of three types:
8ECONOMICS ASSIGNMENT Figure 6: Aggregate demand increase less than aggregate supply (Source: As created by the author) Figure 7: Aggregate supply increase less than aggregate demand (Source: As created by the author)
9ECONOMICS ASSIGNMENT Figure 8: Aggregate demand and aggregate supply increases equally (Source: As created by the author) Thus, it can be seen that though the price levels may increase decrease or remain the same, the real GDP is expected to increase in the economy. e. Increase in immigration Inflow of immigrants increases the labour supply in the market, thereby decreasing the cost of labour input in production which increases the aggregate supply in the economy:
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10ECONOMICS ASSIGNMENT Figure 9: Increase in supply of labour (Source: As created by the author) Thus, the price levels fall and the Real GDP of the economy is expected to increase.
11ECONOMICS ASSIGNMENT References Abs.gov.au.(2018).1345.0-KeyEconomicIndicators,2018.Retrievedfrom http://www.abs.gov.au/AUSSTATS/abs@.nsf/mf/1345.0?opendocument#Prices Abs.gov.au. (2018). 6401.0 - Consumer Price Index, Australia, Mar 2018. Retrieved from http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6401.0Mar%202018? OpenDocument Corden,W.M.(2012).DutchdiseaseinAustralia:policyoptionsforathree‐speed economy.Australian Economic Review,45(3), 290-304. Galí, J. (2013). Notes for a new guide to Keynes (I): wages, aggregate demand, and employment.Journal of the European Economic Association,11(5), 973-1003. Goodwin, N., Harris, J. M., Nelson, J. A., Roach, B., & Torras, M. (2015).Macroeconomics in context. Routledge. Gordon, R. J. (2013).The Phillips curve is alive and well: Inflation and the NAIRU during the slow recovery(No. w19390). National Bureau of Economic Research. Mankiw, N. G. (2014).Principles of macroeconomics. Cengage Learning. Rao,B.B.(Ed.).(2016).Aggregatedemandandsupply:Acritiqueoforthodox macroeconomic modelling. Springer.