Macroeconomics in Global Environment

Running head: MACROECONOMICS IN GLOBAL ENVIRONMENT 1
Macroeconomics in global environment
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MACROECONOMICS IN GLOBAL ENVIRONMENT 2
Question 1
The figure below shows the real GDP per capita of New Zealand and Australia from
1980 to 2005.
The graph shows the real GDP of both countries where from 1980 had a relatively the
same trend with the same levels of income. It was due to lack of productivity in both nations.
However, from the graph New Zealand has consistently diverged fromAustralia’s GDP percapita
from the year of 1970 to 2005. New Zealand experienced a strong growth in productivity with
relatively weak employment growth in the period of 1980. Whereas, in the period of 1990, weak
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MACROECONOMICS IN GLOBAL ENVIRONMENT 3
productivity with a relatively strong employment were also experienced. High inflation was later
experienced in New Zealand during the period of 1980 (Reserve Bank of New Zealand, 2018).
A reduction in demand for mineral commodities was experienced by the Asians due to
economic crisis during 1990. With this crisis, there was an increase in production of
metalliferous commodities by the Australian firms which worsened the oversupply that
maintained the downward mental price pressure. It also increased the production of commodities
from other countries(Burns and Baffes, 2018). More so, there was another burden from gold
producers of England, Russia, Malaysia and Jordan that reduced these prices which resulted in
abolishing of the gold role as national reserve asset. As the result some of the high cost
operations closed and fluctuations in the mining shareholder industry continued. More variations
were seen as reports to the Mineral Council of Australia indicated a decline from 23.0% to 2.0%
in 1997 to 1998 and 1989 to 1990 respectively (Burns and Baffes, 2018). Therefore, different
handling of the Asian crisis of 1990 with restrictive monetary policy of New Zealand contributed
to the divergence in the level of GDP per capita.
Question 2
NewZealand faces a lot of critiques for keeping the official cash rate constant at 1.75%
since 2016 (Burns and Baffes, 2018).Okun’s law explains this situation with an equation below.
Yt – Y*t = ƛ + β (Ut – Ut*) + ἑ. Where Yt – Y*t, is the output gap, ƛ- is the intercept, β- Okun’s
coefficient, (Ut – Ut*) - unemployment gap(Kav, 2012). The law provides a link between output
gap and unemployment gap by relating them to the labor market conditions to the conditions in
the goods market. According to Kav, 2012, the presence of natural rate hypothesis, would result
to a belief that an equilibrium level of the output consistent would be obtained with a long run
stable inflation. However, a great concern with this output gap concept is the difficulty in its