Understanding Macroeconomics Cycles

This assignment delves into the intricate workings of macroeconomic cycles, examining their phases and the interplay between financial markets and broader economic trends. It analyzes various perspectives on macroeconomics, including the financial cycle's impact, home bias in open economies, and the influence of environmental factors. The assignment also explores concepts like imperfect knowledge, balance sheet recessions, and modern money theory, providing a comprehensive understanding of macroeconomic forces shaping the global economy.

INTRODUCTION TO
MACROECONOMICS

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................1
Measuring GDP and Economic Growth..........................................................................................1
A) Computing GDP, wages and supplements as well as gross fixed capital expenses..........1
B) Computing value of the net exports...................................................................................1
C) Explaining the statement...................................................................................................1
D) Calculating real GDP growth rate.....................................................................................2
E) Computation of labour force..............................................................................................3
F) Calculation of employment................................................................................................3
G) Unemployment rate in November 2015............................................................................3
H) Calculating CPI index.......................................................................................................4
I) Computing inflation rate.....................................................................................................4
QUESTION 2...................................................................................................................................5
MINI CASE: NIKE AND SWEATSHOP LABOUR.....................................................................5
1) About the criticism of Nike................................................................................................5
2) About the executives of Nike company.............................................................................5
3) Suggestions for corporate social responsibilities...............................................................5
The United States is likely to Raise Interest Rate soon...................................................................5
A) Impact of interest rates on flow of funds among US and Japan........................................5
B) Impact of interest rates on supply loanable funds and interest rate in Australia...............6
C) Influence of interest rate on exchange rate........................................................................7
QUESTION 3...................................................................................................................................7
Exchange Rate.................................................................................................................................7
A)............................................................................................................................................7
B)............................................................................................................................................8
C)............................................................................................................................................8
D)............................................................................................................................................8
E)............................................................................................................................................8
Economic Growth and Business Cycle............................................................................................8
A) Calculating value of stated output.....................................................................................8
B) Contribution of Mark in GDP............................................................................................9
C) Comment on observation of Mr. Asaud............................................................................9
Balance of Payments........................................................................................................................9
A) Current account balance....................................................................................................9
B) Capital account balance...................................................................................................10
C) Position of US economy..................................................................................................10
REFERENCES..............................................................................................................................11

QUESTION 1
Measuring GDP and Economic Growth
A) Computing GDP, wages and supplements as well as gross fixed capital expenses
GDP = Final Consumption
Expenditures + Gross operating surplus + (Exports – Imports)
GDP = 276552 + 141432 + (58739 – 66166)
= 276552 + 141432 + (-7427)
GDP = $410557 millions
Wages and supplements = GDP at factor cost + Statistical discrepancy + indirect taxes
= 325864 + 4661 + 43030
= $373555 millions
Gross fixed capital expenses = Final Consumption
Expenditures + indirect taxes + (Exports – Imports)
= 276552 + 43030 + (58739 – 66166)
= 276552 + 43030 – 7427
= $312155 millions
B) Computing value of the net exports
Formula of net exports = Total exports of the products and services – Total imports of products
and services
In the present scenario, total exports = $58739
total imports = $66166
Net exports = $58739 - $66166
= -7427 US4 million
On the basis of net export’s value, it can be said that, economy unable to grow positively
and fruitful direction. The reason is that exports are lower as compared to the imports.
1

C) Explaining the statement
The meal cooked by cook of the MS Smith was a part of the employment and generated
income. Therefore, per capita profit in the economy affects adversely by which GDP also
influenced. which is beneficial in terms of boosting national income. Once MS Smith married
with her cook then services provided by her will fall under the social activities where contract of
employment fall (Mankiw, 2014). As of now activity of cooking become services for the family
where any kind of salary not provided by MS Smith to cook. Ultimately, the cook do not
generate any income and unable to contribute in the growth of economy. On the other hand, per
capita income within country also reduced which is negative impact on the national income.
Hence, it can be said that Ms Smith reduces level of national income and GDP growth rate both
within economy after marrying with her cook.
D) Calculating real GDP growth rate
A term of macroeconomic in which output of the adjusted prices are evaluated of those
goods which produced within country in one year is known as real Gross Domestic Product (real
GDP). With the help of this particular approach, economic health is assessed in appropriate
manner (Borio, 2014). Further by considering chain volume measure real GDP growth rate of
2015 and 2016 is computed below:
Real GDP of 2015 and 2016 is computed below:
2015 quantities at 2015 price = (20*2000) + (10*600) +(20*500) = $56000
2016 quantities at 2015 price = (20*2100) + (8*650) + (10*700) = $54200
2015 quantities at 2016 prices = (30*2000) + (8*600) + (10*500) = $69800
2016 quantities at 2016 prices = (30*2100) + (8*650) + (10*700) = $75200
Using chain volume measures computation of real GDP growth rate for both years is
stated below:
Formula of real GDP growth rate = [(GDP of current year – GDP of previous year) / GDP of
previous year] *100 (Pettinger, 2013)
Real GDP growth rate for 2015 = [(54200 – 56000) / 56000] * 100
2

= (-1800 / 56000) * 100
= -3.21%
Real GDP growth rate for 2016 = [(75200 – 69800) / 69800] * 100
= (5400 / 69800) * 100
= 7.74%
Real GDP growth rate among both the years 2015 and 2016 = Growth rate of 2016 –
Growth rate of 2015
= 7.74% - (-3.21%)
= 7.74% + 3.21%
= 10.95%
E) Computation of labour force
Labour force participation rate = (Labour force / Working age population) * 100
Therefore,
Labour force = Working age population * Work force participation rate
= 20429726 * 64.9%
= 13258892
F) Calculation of employment
Employment to population ratio = (Number of people employed / working population) * 100
Therefore,
Employment = Working population * employment to population ratio
= 20429726 * 61.3%
= 12523422
G) Unemployment rate in November 2015
Formula of computing unemployment rate = (Number of people unemployed / Total workforce)
* 100
3

In October 2015 in New South Wales unemployed people = 200,500
Total work force = 3,903,200
In November, unemployed population = 200,500 + 900 = 201,400
Total labour force = 3,903,200 + 1000 = 3,90,4200
Unemployment rate in November 2015 = (201400 / 3904200) * 100
= 0.0516 * 100
= 5.16%
H) Calculating CPI index
Formula of CPI index = Current price of CPI basket / Base price of CPI basket * 100
Formula of CPI basket = Quantity of product * cost + Quantity of product * cost + …...........n
CPI basket for the current year = (20 * 6) + (10 * 8)
= $120 + $80
= $200
CPI basket for the base year = $80 + $50 = $130
CPI index at current year = $200 / $130 *100
= 153.85%
I) Computing inflation rate
Formula of inflation rate = [(CPI in current year - CPI in previous year) / CPI in previous
year] *100
CPI in current year = 153.85%
CPI in previous year = $65 / $65 * 100
= 100%
Inflation rate = [(153.85 – 100) / 100] * 100
= [53.85 / 100] * 100
= 53.85%
4

It indicates that price level of the juice and cloth will enhance highly because rate of
inflation is very high.
QUESTION 2
MINI CASE: NIKE AND SWEATSHOP LABOUR
1) About the criticism of Nike
After analysing criticism of Nike, it can be said that, it is fair because management is
unable in manufacturing adequate shoes. In host economies unemployment rate is higher in
which when the Nike provides low wages to people then also they would like to work (Wray,
2015). Henceforth, criticism done by Nike business entity is proper as well as fair.
2) About the executives of Nike company
In each and every company or factory labour always concerned towards the wage aspect
for which they working. Every labour's main concern is towards the wage element while working
in the an enterprise. As the firm provides wages according to standards settled out by authority
framework in country then employees will sustain for long term. In the world economy rate of
minimum wage is different. Therefore, it can be said that executive officers of the Nike
company should allow workforce for sensitive charges in the overseas factories. The reason is
that when Nike gives fair wages along with health and safety benefits then workers will sustain
(Fischer and Heutel, 2013). Hence, executives of cited firm i.e. Nike should prevent sensitive
charges in an appropriate way in the factories located in overseas.
3) Suggestions for corporate social responsibilities
Of course, the companies need to consider various kinds of corporate social
responsibilities within working environment at the time of making decisions about investment.
The reason is that, such kinds of activities boost up brand image in the society as well as
corporate world in highly positive direction. As the firm uses more number of CSR initiatives
then customers and employees will get attracted towards it. Therefore, productivity of the overall
entity will enhance along with the sales and revenue (Koo, 2013). Hence, it can be said that,
firms should adopt different CSR activities in the workplace.
5

The United States is likely to Raise Interest Rate soon
A) Impact of interest rates on flow of funds among US and Japan
It is expected that interest rates in US are likely to increase whereas such rates in EU,
Australia and Japan are at the lowest levels. In this situation, flow of funds will change among
US and Japan’s economy positively Further, flow of capital from Japan towards US and from US
towards Japan will increase and decrease respectively. The reason is that, people of US will
prefer to borrow loan from Japan due to having lower financing cost in form of interest.
B) Impact of interest rates on supply loanable funds and interest rate in Australia
Increase in interest rates of US create impact on supply level of loanable funds and
interest rate both of Australia positively and adversely respectively. The reason is that, US
population prefer to take loan from Australia at the lower interest rate which lead to enhance
supply of loanable amounts. On the other hand, as demand of loanable funds increasing then
Australia will cut down rate of interest for attracting more borrowers (Spaulding, 2017). Further,
relation between US interest rates and supply of loanable funds is presented through below
graph:
6

Apart from this, loanable funds and if interest rate on home loan declines in Australian
economy then demand of housing will increase which will boost up house prices in the market.
Further, as people demand for more home loan, then debt burden of household will increase to
higher extent in Australian economy.
C) Influence of interest rate on exchange rate
As the interest rates in US increases then people prefer those countries for taking loan in
which interest is low like Japan, Australia in the present case. Due to this condition, value of
Australian dollar will affect positively and US dollar will in negative position. Therefore,
exchange rate will appreciate in the present scenario against to the US dollar up to the better
extent. Apart from this, as exchange rate rises then exports from Australia to United States will
reduce and ultimately cash inflows as well (Coeurdacier and Rey, 2013). When talking about the
imports of Australia then they will get increased from US which lead to improvement in cash
outflows in another country. In this case, current account balance of Australian economy will at
the declining situation because of outflows will higher than inflows.
QUESTION 3
Exchange Rate
A)
When export of the domestic country become more popular in the foreign countries then
demand of the domestic currency will be affected in positive direction. Therefore, demand curve
will shift in upward direction in the equilibrium chart (Lengnick and Wohltmann, 2013). In same
condition, supply curve will also shift in same direction which is stated below:
7

B)
The situation in which domestic economy faces issue of recession and on the other side
other economies are at the growing position. During recession value of money get reduced to a
greater level due to which demand will also decline. Henceforth, demand curve of the domestic
currency will shift downward in the chart.
C)
As inflation rate in the country accelerates then prices of goods and services are affected
in unfavourable condition which lead to decline demand. Ultimately, people do not want to make
investment or purchase domestic currency by which demand and supply both curves will shift
downward (Lengnick and Wohltmann, 2013).
D)
In the domestic country, real interest rates improve and in the same year such rates
remain unchanged in other economies. At this position, banks of the domestic country will
provide loan on higher interest rates which will lead to decline in demand of the currency. Due to
this reason, demand curve in equilibrium chart shifts downward.
8

E)
Tourism industry when increases in domestic country sharply due to fare war between the
airlines then demand of currency will improve up to the better level. Along with this, supply of
the domestic currency also affects in positive direction (Frydman and Goldberg, 2013). Hence,
supply as well as demand curve of domestic currency will shift in upward direction.
Economic Growth and Business Cycle
A) Calculating value of stated output
Sr. No. Name of products and
services
Units of products and
services
Price per
unit (in $)
Value of the output
(in $) (units * price)
1 Food product 3 million kilograms 1 30,00,000
2 Shirt 50000 20 10,00,000
3 House 20 50000 10,00,000
4 Medical services 50000 hours 20 10,00,000
5 Motor car plant 1 1 million 10,00,000
6 Tank 2 50000 1,00,000
B) Contribution of Mark in GDP
According to the expenditure approach of GDP calculation any kind of incomes and
investments are not entertained. Along with this, expenses made by a person in order to purchase
new goods and equipment are included to perform GDP construction calculation (Brown and
et.al., 2014). In the present scenario of Mark who is working as part-time employee in Pizza hut
purchased second hand car. Apart from this, any other kinds of expenses are not made by Mark
in the economy. Hence, Mark do not contribute anything in the growth rate or GDP of the
economy.
C) Comment on observation of Mr. Asaud
According to the interview it has been observed that, sales of car increases in the first
quarter as compared to the second quarter. Apart from this, Mr. Asaud said that he sold more
9

quantity of cars in the third and fourth both quarters in the recession in comparison to second
quarter. Hence, views of Mr. Asaud on the recovery of recession within economy are not correct.
On the other hand, sales of cars were higher in last year, during third and fourth quarter in
comparison to present year. Therefore, Mr. Asaud is correct that any kind of recovery is not there
in economy. Observations of the car dealer indicates that, the business is between trough and
expansion stage of the business life cycle in the economy (Akrani, 2011).
Balance of Payments
A) Current account balance
Formula of computing current account balance (CB) = (EX – IM) + NI +NT
Whereas,
EX = exports of products and services
IM = Imports of products and services
NI = Net interest income
NT = Net transfers
CB = (1430 – 1757) + 10 – 88
= -327 – 78
= -405 U.S. Dollars
B) Capital account balance
Formula of capital account in balance of payments = Investment from abroad –
investment to abroad
= 1031 – 501
= 530 U.S. Dollars
C) Position of US economy
In this year economy of the US was at the position of net borrower due to investment
from abroad in the country were higher as compared to investment done in abroad by US.
10

REFERENCES
Books and Journals
Borio, C., 2014. The financial cycle and macroeconomics: What have we learnt? Journal of
Banking & Finance. 45. pp. 182-198.
Brown, J. H. and et.al., 2014. Macroecology meets macroeconomics: Resource scarcity and
global sustainability. Ecological engineering. 65. pp. 24-32.
Coeurdacier, N. and Rey, H., 2013. Home bias in open economy financial macroeconomics.
Journal of Economic Literature. 51(1). pp. 63-115.
Dassonneville, R. and Lewis-Beck, M. S., 2014. Macroeconomics, economic crisis and
electoral outcomes: A national European pool. Acta Politica. 49(4). pp. 372-394.
Fischer, C. and Heutel, G., 2013. Environmental macroeconomics: Environmental policy,
business cycles, and directed technical change. Annu. Rev. Resour. Econ. 5(1). pp. 197-
210.
Frydman, R. and Goldberg, M. D., 2013. The imperfect knowledge imperative in modern
macroeconomics and finance theory. Rethinking expectations: The way forward for
macroeconomics, pp.130-168.
Koo, R., 2013. Balance sheet recession as the ‘other half ‘of macroeconomics. European
Journal of Economics and Economic Policies: Intervention. 10(2). pp. 136-157.
Lengnick, M. and Wohltmann, H. W., 2013. Agent-based financial markets and New
Keynesian macroeconomics: a synthesis. Journal of Economic Interaction and
Coordination. 8(1). pp. 1-32.
Mankiw, N. G., 2014. Principles of macroeconomics. Cengage Learning.
Wray, L. R., 2015. Modern money theory: A primer on macroeconomics for sovereign
monetary systems. Springer.
Online
Akrani, G., 2011. 4 Phases of Business Cycle in Economics. [Online]. Available through:
<http://kalyan-city.blogspot.in/2011/06/4-phases-of-business-cycle-in-economics.html>
[Accessed on 6th September 2017].
Pettinger, T., 2013. GDP at Chained volume measure. [Online]. Available through:
<http://www.economicshelp.org/blog/7397/economics/gdp-at-chained-volume-measure/>
[Accessed on 6th September 2017].
Spaulding, W. C., 2017. Interest Rates and Loanable Funds. [Online]. Available through:
<http://thismatter.com/economics/interest-rates-loanable-funds.htm> [Accessed on 6th
September 2017].
11