Collect and present (in line graph format), annual data for the ten years from 2006 to 2015 showing the rate of growth of real GDP, the inflation rate, and the unemployment rate for Australia, the United Kingdom and one Euro-zone economy of your choice that uses the Euro currency. For Question 1 you have to produce a total of three time-series line graphs: one graph for each economy containing all three variables: (1) the rate of growth of real GDP, (2) the inflation rate, and (3) the unemployment rate. Label each axis, give your chart a title and state source of data.
The data used to answer this question has been taken from the World Bank database of the indicators. The same source has been used for the inflation rate, the unemployment rate and the growth of real GDP.
Fig. 1 represents the rate of growth of real GDP of the three countries- Australia, United Kingdom and France which has been taken as the European country which uses the Euro.
Using the data collected for Question 1 – covering the ten years from 2006 to 2015 -, present three comparative line graphs. The first graph will show the rate of growth of real GDP of Australia, the United Kingdom and your chosen Euro-zone economy that uses the Euro currency. The second comparative line graph will show the inflation rate of the three economies and the third line graph will show the unemployment rate of the three economies.
In fig. 1 the growth in real GDP which is often taken as a proxy for the economic performance of the country is plotted of the three countries being taken into consideration, the United Kingdom, Australia and France. As can be seen that Australia was the country least affected by the Global Financial Crisis with its growth rate decreasing but never going into recession. It had returned to its pre-GFC level by 2012 when there was again a downturn due to a decrease in the consumption of services (Janda, 2012). Australia had again recovered by 2014 due to the export boom and the mining industry which lead to great economic performance of the country all around (Jericho, 2014).
The UK and France had suffered deeply from the GFC and had negative growth rates in 2009. Then they again suffered a slowdown in the economy as a result of the recession which the Eurozone slipped back into in 2012 (Thompson, 2012). France though was able to forge through this and was able to show 0.2% growth which was unexpected (Matlack, 2012). UK remained relatively better off with not being involved very heavily in the debt crisis. Since then UK has overtaken the growth rate of Australia at the end of the period and France has recovered though not to its initial position.
In fig.2 we see the inflation rates of the three countries. The inflation rate of the three countries follows the same trends in the graph till 2013. In UK the inflation fell in 2009 as a result of GFC and again in 2012 as a result of the European crisis. It reached its all time low in 50 years in 2015 (Cadman, 2016). The inflation rates of France are similar with it showing a dip in after the GFC and the European crisis and have remained low ever since reaching to almost 0 at the end of the period. The Australian inflation has been higher than the two in the end of the period but has shown similar dips as the one before.
Fig. 3 is used to represent the unemployment rate across the three countries. As can be seen France had the highest unemployment among the countries and continues to do so during the entire period. While Australia had the lowest unemployment among them for most of the period it is seen that it has been replaced by the UK towards the end of the period taken. Though Australia enjoys consistently low unemployment one of the major reasons for this has been how the Australian government measures who is unemployed or not. It has strict rules for not including any worker who has worked even an hour in a week and also it sets up strict rules to what qualifies as actively searching for a new job leading to a lot of people who are actually unemployed to not being counted (Murphy, 2016).
In France the unemployment has always been high. The structural unemployment in the country has proved to be burdensome for the country. The major underlying causes of this are the rigidity in the labour market and there are huge liberties with the wage contracts of the people which the French government is not taking enough steps to look over (Khan, 2016). The UK had maintained a steady level of unemployment has been able to reduce it further by taking recovery measures and these have brought down unemployment and also youth unemployment (BBC News, 2014).
Use the following graph to answer the questions.
The equilibrium real GDP is reached when the Real GDP curve intersects the Real Aggregate expenditure curve. This happens in the above situation in the point when Y=1200. So the value of the equilibrium real GDP is $1200 billions.
To gauge the value of the marginal propensity to consume it might be useful to note that at equilibrium Y=AD=1200. When Y increases to 1400 i.e. increases by 200, the AD increases to 1360 i.e. by 160. So the propensity of consumption should be (1-(ΔAD/ΔY)). Here that would be
(1-(160/200))
= 1-0.8
= 0.2
The value of the multiplier is (1/1-c)) where c is the propensity to consume. Here c = 0.2
So the value of the multiplier is
=1/0.8
=1.25
When the real GDP is $1000 billion the AD is $1040 billion. So there is extra demand so to meet these inventories must be sold. The amount would be $(1040-1000) billion = $40billion worth of unplanned decrease in inventories must take place to meet demand.
When real GDP is $1200 billion, AD is also the same as at this point economy is in equilibrium. So there is no change in unplanned inventory.
When the real GDP is $1400 billion the AD is $1360 billion and hence there is an unplanned increase in the inventories by $40 billion.
Draw a basic aggregate demand and aggregate supply model (including SAS and LAS) that shows the economy is initially in both short-run and long-run equilibrium. Identify the starting point of the economy in both short-run and long-run equilibrium as point A with the price level PL1 and real GDP at Y1.
shows a normal economy and their aggregate supply and aggregate demand curves. The aggregate demand of the economy is given by AD1 and the aggregate supply of the economy is given by AS1. The long run aggregate supply is given by LRAS1. The point at which the AS1 and the AD1 curves intersect is given by A. This corresponds to a price level of PL1 and a GDP of Y1.
Beginning at long-run equilibrium point A with price level PL1 and real GDP at Y1, use the basic (static) aggregate demand and aggregate supply model to illustrate and explain what happens in the short run when the economy suffers a supply shock. Within the initial AD-AS graph make the necessary changes caused by the supply shock and identify the new short-run equilibrium as point B with the new price level PL2 at the new real GDP Y2.
When there has been a supply shock in the economy this affects the supply side of the economy. Let us assume that the supply shock has been such that it affects the economy negatively. This causes the natural level of output to fall. Where it was Y1 before it has now fallen to Y2. So at point A, the output is greater than the natural level of output which would imply that the price level is higher than the expected price level. So the Aggregate Supply curve shifts upward to adjust this till it comes to point B where the GDP is Y2 and the price level increases to PL2. The aggregate supply curve is now AS2.
Now draw a new diagram that is a copy of the amended basic (static) aggregate demand and aggregate supply model used in your answer to question 4.1 above. This new diagram includes points A and B and the associated price levels PL1 and PL2 and real GDP Y1 and Y2.Referring to the short-run aggregate supply curve, illustrate and explain with the help of the new diagram what happens in the long run following this supply shock.
The aggregate supply curve shifts upwards in the light of a negative supply shock so as to have the output at the natural level of output which also decreases permanently in light of the shock. The long run aggregate supply curve which is found after the supply shock corresponds to the new natural level of output and is given by LRAS 2.
References
BBC News. (2014). UK unemployment rate falls to five-year low – BBC News. [online] Available at: https://www.bbc.com/news/business-27406457 [Accessed 1 May 2017].
Cadman, E. (2016). UK had lowest inflation in 2015 for 50 years. [online] Ft.com. Available at: https://www.ft.com/content/b278bffc-be90-11e5-9fdb-87b8d15baec2 [Accessed 1 May 2017].
Janda, M. (2012). GDP shows strong but slowing economic growth. [online] ABC News. Available at: https://www.abc.net.au/news/2012-09-05/australia-june-gdp-figures/4244126 [Accessed 1 May 2017].
Jericho, G. (2014). Australia’s GDP has risen again – here are six things you need to know. [online] the Guardian. Available at: https://www.theguardian.com/business/grogonomics/2014/sep/05/australias-gdp-risen-six-things [Accessed 1 May 2017].
Khan, M. (2016). Letting the side down: French unemployment at 12-month high. [online] Ft.com. Available at: https://www.ft.com/content/5b940ebb-5115-35b9-a253-ad2c6aa090ad [Accessed 1 May 2017].
Matlack, M. (2012). Europe’s Economy: Look Out Below, Again. [online] Bloomberg.com. Available at: https://www.bloomberg.com/news/articles/2012-11-15/europes-economy-look-out-below-again [Accessed 1 May 2017].
Murphy, J. (2016). Australia has an employment problem that no one’s talking about. [online] NewsComAu. Available at: https://www.news.com.au/finance/economy/australian-economy/hopeless-cases-the-bitter-taste-of-australias-employment-problem/news-story/ae4504c4341e10b27098ef1680edc8fd [Accessed 1 May 2017].
Thompson, M. (2012). Eurozone slips back into recession. [online] CNNMoney. Available at: https://money.cnn.com/2012/11/15/news/economy/eurozone-recession/ [Accessed 1 May 2017].
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