Economics Assignment Report - Assessment 3, Economics, June 2018

This economics assignment report, prepared for a Bachelor of Applied Management course, comprehensively addresses macroeconomic concepts, government influence, and international trade. Section A examines the Consumer Price Index (CPI) and Gross Domestic Product (GDP), analyzing their calculation and significance. Section B delves into aggregate demand and supply, exploring factors that shift these curves and their impact on the economy, including the effects of business confidence, interest rates, and migration. Section C focuses on fiscal and monetary policies, evaluating their advantages and disadvantages in the context of New Zealand's economy, including the impacts of tax cuts and bank rate adjustments. Finally, Section D analyzes international trade, comparative advantages, and balance of payments, examining New Zealand's trade relationships and the implications of trade agreements. The report incorporates graphs and figures to illustrate economic concepts and includes references to relevant sources.

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conomics AssignmentE
Report
7/27/2018
Student name

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Contents
Section A....................................................................................................................................2
Section B....................................................................................................................................4
Section C....................................................................................................................................9
Section D..................................................................................................................................11
References................................................................................................................................16

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Section A
Q1) CPI
CPI measures the changes in price level of market basket of consumer goods and services
purchased by households (Reserve Bank of New Zealand, 2018). The CPI is calculated:
Where‘t’ refers to price in given year and ‘b’ refers to base year
t= 1119
b= 1080
CPI = 1119/1080*100
= 103.62
Q2) GDP
a) In Excel file

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b)
Situation Included or Excluded
(in the calculation of GDP)
(i) The voluntary work of a group in cleaning up a local
reserve. Not included
(ii) Activities of the underground economy. Not included
(iii) The purchase of alcohol for a party. Included
(iv) The money spent on cleaning up the mess resulting
from a road accident and hospital care for injured
passengers.
Included
(v) The proceeds from illegal activities that do not go
through a market. Not included
(vi) Spending by the government on new motorways out
of all the main centers. Included
(vii) A student renting a video for the weekend. Not Included
(viii) Non-market activity such as growing your own
vegetables or paving your own driveway. Not included
(ix) A business upgrading its computer network. Included
(x) An electrician does the wiring for his neighbor (a
plumber) in exchange for unblocking his drain, i.e.
payments in kind.
Not included
(xi) A builder build a block of flats. Included
(xii) Paying for electricity. Included
c) It measures total value of everything produced without factoring in debt.
It does not include the value of education except the amount what people pay for it.
It does not include the development of new technology (CEIC, 2017).
d)
The reason to calculate both the indexes is that real values are adjusted for inflation whereas
nominal values are the actual monetary unit count of GDP.
e) Real GDP per capita is a measurement of the total economic output of a country divided by
number of people adjusted for inflation. This measure is calculated to compare the standard
of living between the countries.

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f) 1. Real GDP does not incorporate any measure of welfare. It only described the values of
the finished goods.
2. GDP ignores the externalities. GDP does not involve the use of renewable and non-
renewable resources in calculation (CEIC, 2017).
Section B
Situation
Direction that AD
shifts inward or
outward
AD curve does
not shift place a
cross (X)
(i) Income tax rates decrease Outward
(ii) A rise in business confidence Outward
(iii) A larger than expected budget surplus Outward
(iv) Interest rates rise as the OCR is raised Inward
(v) The government announces that GST will
increase in six months time Outward
(vi) New technology Outward
(vii) Costs of production fall Outward
(viii) A fall in business confidence Inward
(ix) Transfer payments are increased X
(x) Next exports $1 912m surplus Outward
(xi) The Reserve Bank Governor lowers the
OCR and interest rates fall Outward
(xii) Contractionary fiscal policy Inward
(xiii) A net migration loss Inward
(xiv) A budget surplus Outward
(xv) A large increase in households starting to
save for their retirement Inward
(xvi) Consumers go on a spending spree fearing
price rises in the future Outward

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2)
Situation
Direction that AS
curve will shift
inward or outward
AD curve does
not shift place a
cross (X)
(i) New technology is developed Inward
(ii) Workers’ productivity falls as machinery
wears out and depreciates Outward
(iii) Workers’ wages rise Inward
(iv) New Zealand dollar appreciates resulting in
a fall in the price of imported raw materials Inward
(v) The government runs a budget surplus Outward
(vi) Rising oil prices Outward
(vii) An increase in investment spending by
firms Outward
(viii) Household incomes fall Inward
(ix) An increase in GST Inward
3) If the net migration is increasing in NZ then there will be a decrease in demand in the
country due to migration of people to other country. The AD will shift leftwards, as there is
decrease in the demand and consumption by the consumers. From the graph, it can be said
that the consumption will decrease in the country and results into the decrease in the supply
also. This decrease in demand and supply shift the quantity demanded to Q’. This will
decrease the GDP of the country.

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Figure 1
Q4)
a) A fall in business confidence
Figure 2
From the graph, it can be analysed that real GDP and inflation rate will fall and there will be
a rise in unemployment.

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B) A large increase in households starting to save for their retirement
Figure 3
From the graph, it can be analysed that real GDP, inflation, and employment will fall.
C) A rise in business confidence
Figure 4

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From the graph, it can be analysed that will be a rise in GDP and inflation and there will be
less unemployment.
Q5) (i)
Here ‘a’ represents the inflationary gap
ADf = Aggregate demand at full employment level
AS = Aggregate Supply
Figure 5
(ii)

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Figure 6
From increase in transfer payment, there will be an increase in aggregate demand (AD).
According to the Keynesian economics, transfer payment multiplier is the multiple by which
AD will increase when there is an increase in the transfer payment. The difference between
Y1 and Y2 is the change in income and price will remain constant. This will boost the growth
in the economy.
Section C
Q1)
Advantages to purchase a property in New Zealand are that the person who purchases the
property has full control over the investment. The purchaser has the power to decide about
their investment, as they are stable in nature.
Disadvantages:
The initial cost to the purchasing a property is found to be high
It takes long time to sell the property in the market that means investment in property cannot
be easily converted into cash.
The property market in New Zealand is affecting the aggregate demand and supply of the
country. At present in New Zealand the property market is at peak of 12% , majority of the
person are investing their money in it. From this the consumption and production has been
showing the decreasing trend in the market. This affect the government planned policies.

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From this the objective of government like redistribution of income and wealth and stabilise
rate of economic growth has been affected.
Q2) Monetary policy
Figure 7
The monetary policy discussed in the article is related to the bank rate. Reserve Bank of New
Zealand has cut down the mortgage rate so that the people can take more loans in the country.
By taking, more loans by the individuals make the aim of achieving the broader macro-
economic policy objectives of low inflation and sustainable economic growth.
In New Zealand, the OCR has been put more heat into the housing market. This would results
in raising the rates by the reserve bank of New Zealand.
The monetary policy used in case is bank rate and change in variable reserve ratio. In this the
change in the rates are done to control the situation of inflation and deflation in the country.
There is increased in the case of inflation so that the individual takes fewer loans and
inflation will be stabilised. On other hand, if there is a deflation in the country, then reserve
bank will lower the interest rates on loan so that more lain can be given and money power can
be float in the market. This will maintain the economic situation in the country (Reserve
Bank of New Zealand, 2018).
From the graph it can be seen that the consumer are demanding more loan due to reduction in
the tax rate which will shift equilibrium from E to E’.
Q3) Fiscal policy

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The objective of fiscal policy is to maintain the condition of full employment, economic
stability and to stabilize the rate of growth.
The policy used in the above case is related to the cutting down the tax around $2 billion and
boost to working for families and their accommodation supplement.
The potential impact of this policy in New Zealand id found to be that there will be economic
growth in the country due to the reduction in taxes. In short run, it can affect the level of
activity in economy by making the changes in aggregate demand for the goods and services.
In long run, fiscal policy may affect long-term economic growth of the country. Due to the
cut in the tax rates, it will affect the supply of labour and capital in the New Zealand. The
labour and capital will now be more economical (The Treasury, 2018). rom the graph it canF ,
be analysed that both AD and AS will rise due to the reduction in the ta rate Due to reduction in tax . x
rate both consumption and production will get economical, .
Figure 8
Section D
Q1) International trade
a) From the table it can be said that the New Zealand has the comparative advantage in
producing the wool, as the output per worker is more in case of NZ annually.
b) From the table it can be said that the New Zealand has the comparative advantage in
producing the fish, as the output per worker is more in case of NZ annually.

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OUTPUT PER WORKER PER ANNUM
WOOL FISH
NZ 60 90
AUSTRALIA 50 30
c) It is good for New Zealand to deal in fish and wool as they can gain benefit
internationally from this. On the contrary, if Australia is producing fish and wool,
then they have to bear the losses in producing these things as they have the less output
per worker annually than New Zealand. It is recommended that Australia to purchase
both item from New Zealand.
d) The biggest disadvantage that NZ consumer will face is that they get the meat at high
cost, which will decrease the consumption in the country due to the agreement made
between them. Moreover, this agreement will work as a loss to Chinese producer as
new players are entering into the market. So China has to made the high-end networks
while distributing the meat otherwise they are not able to charge the premium prices
from their customers.
Q2) Balance of payments
a)
Transactions Category
(i) Foreign tourist using domestic airline. Export of service
(ii) Premium paid to an overseas insurance company. Import of service
(iii) Interest paid by domestic companies for foreign bank
loans.
Investment in income
payment
(iv) Aluminium hub caps sold in Detroit by a New Zealand
firm.
Export of goods
(v) Foreign aid to a tsunami ravaged Pacific neighbor. Balance of current
transfers
(vi) Dividends received by domestic shareholders from
overseas.
Investment income receipt

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(vii) A New Zealand firm buys cars from Japan. Import of goods
(viii) A New Zealand flies on a plane operated by Singapore
Airlines.
Import of services
(ix) An Australian firm uses a New Zealand firm to ship its
produce to an Asian destination.
Export of services
b)
NZ able to gain more business income from other country as people will take the goods and
services from NZ.
The current account will show an increase in demand for NZ currency that is $NZ.
Current account shows an increase in trade in goods and services (Blanchard & Adler, 2015).
Foreign exchange
C
Situation
Demand for
$NZ or supply
of $NZ?
Direction
of shift
Appreciation or
depreciation of
$NZ?
(i) New Zealand tourist traveling
overseas Supply Leftward Depreciation
(ii) New Zealand importers paying
for raw materials demand Rightward Appreciate
(iii
)
New Zealand firm setting up in
Fiji Demand Rightward Appreciate
(iv
)
The Fijian government buying
New Zealand goods and
services
Supply leftward Depreciate
(v) Loss of overseas markets
markets for New Zealand Supply Rightward Depreciate
d) The NZ dollar has been falling as compared to the US dollar. This means that one NZ
dollar can be purchased in one US dollar. So with the same amount of US dollar more goods
can be purchased from NZ. It means exports to US have become cheaper. This may results in
the increase in exports to US.

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On the other hand, when there is an increase in NZ dollar as compared to the AUD. This
means that one AUD dollar can be purchased in one NZ dollar. From this, more goods and
services can be purchased by spending the same NZ dollar. This will make the exports
cheaper and results into more exports to NZ (Scitovsky, 2016).
e)
NZ dollar for international education industry create economic impact which include tuition
fees, living expenses by students, and education incomes. It will also impact on the revenue
from the sale of professional services like teaching, training students, development, assurance
for quality, consulting and recommended services. Each dollar spent on the education will
leads to increase the output in education industry.
f)
The increases in the expansionary monetary policy will increase the growth in the country.
This strategy is used to boost the economic activity, mainly by keeping the interest rates low
to encourage the borrowing by the individuals, banks and companies. This policy will lower
the exchange rate and weaken the financial position of the country. There will be an increase
in demand for goods and services. All of this lower the value of dollar and decreases the
exchange rate as more people demand for foreign currencies to pay for goods (McCombie &
Thirlwall, 2016).
The contractionary monetary policy will slow down the economic growth, increase
unemployment depress borrowing and spending the consumers and businesses. In order to
control the inflationary situation, there will be a decrease in the money supply. This will
increase in the exchange rate as less people exchange or demand the foreign currencies.
Q3)
a)
From the graph, it can be analysed that recession in USA will bring the downfall in the
market of NZ. This downfall results into the decrease in the price and quantity of the goods
and services. This will affect depreciation in currency.

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Figure 9
b)
From the graph it can be analysed that there will be an increase in the quantity and decrease
in the price of taking loan due to the increase in the interest rate in the country. This will give
the less purchasing power in the hands of investor in the country and people will take fewer
loans for their investment purpose than taken if the interest loan is low. This will depreciate
the currency of NZ.

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Figure 10
c) From the graph, it can be analysed that there will be an increase in the AD in the country
due to the expansion of industries in NZ. This will bring the increase in the quantity
demanded and bring down the price lower than before. This will enhance the exports in the
country. This will make the appreciation in the currency of NZ (Schechner, 2017).
Figure 11

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References
Blanchard, O., & Adler, G. (2015). Can Foreign Exchange Intervention Stem Exchange Rate
Pressures from Global Capital Flow Shocks? (No. w21427). National Bureau of
Economic Research.
CEIC. (2017). New Zealand Real GDP Growth. Retrieved from:
https://www.rbnz.govt.nz/statistics/key-graphs/key-graph-real-gdp
McCombie, J., & Thirlwall, A. P. (2016). Economic growth and the balance-of-payments
constraint. Springer.
Reserve Bank of New Zealand. (2018). Monetary Policy. Retrieved from:
https://www.rbnz.govt.nz/monetary-policy
Reserve Bank of New Zealand. (2018). Real GDP. Retrieved from:
https://www.rbnz.govt.nz/statistics/key-graphs/key-graph-real-gdp
Schechner, R. (2017). Performance studies: An introduction. Oxon: Routledge.
Scitovsky, T. (2016). Money and the Balance of Payments. Oxon: Routledge.
The Treasury. (2018). Fiscal Strategy. Retrieved from: https://treasury.govt.nz/information-
and-services/financial-management-and-advice/fiscal-strategy