ECONOMICS - MACROECONOMICS ASSIGNMENT

INSTRUCTIONS

For each of the 4 questions below, write a brief explanation in answer to each part of each question. Marks awarded will depend on the quality of the reasoning exhibited, the ability to express the argument in a concise manner (including the use of diagrams and mathematics) and the organisation of your answer.

Question One -

a) The economy of 'Kraftwerk' has just three producers. For the year 2016 you are given the following information:

Timmy's Forestry firm produces $128m (million) of spruce pine timber. Of this, there are eXport sales of $96m; and sales to Gab's Guitar Factory of $32m. Timmy's Forestry pays $16m of wages and $16m rent for the forest. Note that Timmy has no input costs.

Gab's Guitar Factory produces $192m of musical instruments.  Of this, Gab eXports $96m and sells the remaining $96m to Sue's superstore. Gab's Guitar Factory iMports $32m of electronic components as an input. (Note Gab's other input cost is the $32m of timber bought from Timmy.) Gab pays $32m wages and $16m rent.

Sue's Superstore sells $256m worth of merchandise. This comprises: direct sales to Consumers of $128m; sales of $96m of musical instruments to the Government for its schools; and $32m of unsold inventories. Sue iMports $32m of assorted goods that she adds value to (e.g. other musical instruments, clothes, furniture, etc. [these are intermediate goods]). (Note Sue also purchased $96m of musical instruments from Gab which are intermediate goods [input costs].) Sue pays $48m wages and $32m rent.

Your task is to calculate Kraftwerk's GDP by using the three approaches: expenditure, value-added and income method.

It is important in this exercise to show your working for each step so it is clear how you derived your answer.

Remember:

Value-added = (value of output) -  (cost of intermediate goods [i.e. inputs] purchased from other firms, including  imports)

• Profit = (value of output)-(inputs costs + wages + rent + interest payments)
• Gab's electronic components and Sue's assorted goods are iMports as well as intermediate goods. (They are not Investment)
• Sue's $16m of unsold inventoriesisan Investment.

b) Assume that Kraftwerk's GDP has been growing significantly over the last few years, yet some of the citizens are protesting that their quality of life is not improving. Identify and discuss three possible reasons why the growing GDP does not necessarily mean everyone in that economy is better off.

Question Two -

Consider the following hypothetical economy:

Consumption (C) = 300 + 0.8Y

Investment (I) = 200

Government expenditure (G) = 200

Net exports (NX) = -100

(Assume the amounts are billions of dollars.)

Calculate the equilibrium level of real GDP in this economy.

Work out the multiplier from the information given in b) above.

Assume that full employment output for this economy is $3500 billion (this is also called potential GDP). Given your answer (above), by how much is the economy below full employment output?

Next, calculate how much the government should increase or decrease spending to close the gap between actual and potential real GDP. (Assume that all other things are equal [ceteris paribus], i.e., no change in tax, investment, imports etc.)

In your own word explain why the injection of government expenditure actually increases GDP by more than the initial injection of G expenditure.

Question Three -

Government policies such as   first home buyer's grants and tax concession for investors (e.g. tax deductions allowed on property expenses) actually make housing less affordable for average wage earners. Using demand and supply analysis, argue what would be a more effective government policy to help make housing more affordable.  (Hint: the policies mentioned increase demand; therefore the opposite is required. What is this and why?)

Do you agree that one goal of macroeconomics should be to reduce the measured unemployment rate to zero? Why or why not?

If a person was cyclically unemployed for a while, explain how this might become structural unemployment?

Question Four -

This question requires a reference list

Since 1970, developing countries have experienced significant population growth. Is population growth 'bad' for developing countries? Illustrate with real world examples, stating clearly the advantages and disadvantages of a country experiencing population growth.

Write a brief report about your home country's macroeconomic conditions (e.g. unemployment rate, inflation rate, interest rates, current account deficit, etc.) . Also discuss what are two macroeconomic challenges that your home country faces over the next decade? What policies or actions have governments taken to address these challenges?