MACRO1

MACRO1 (ECON1016)
Assignment 1
Student Name: Joey Lee
Student ID: S3744960
This assignment covers the following topics:
Unemployment (Chapter 28 or Chapter 9)
Productivity and Growth (Chapter 26 or Chapter 7)
Saving, Investment and Financial System (Chapter 27 or Chapter 8)
READ THE FOLLOWING FIRST (Very Important)
This assignment contributes to 20% of the overall marks for the course.
Only a single submission permitted (hence, please ensure to attach the file version of the assignment)
Use and Submit this template only and Write your answers in each question below for your submission – any other form of the file is NOT accepted (Failing to do so will automatically mean zero mark for this task).

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The font size has to be at least 12.

Explain your answers, but be succinct.
Label each axis and explain the diagram that you use carefully (if any).
Show all of your working in order to get partial credits.

After the due date any late submission will be marked as ‘late’. A penalty of 10% of the allocated marks (i.e., 2 marks) per day will apply for late submissions.

A failure of your home computer (or any kind of IT problem) cannot be a reason for the late submission (all requests for an extension of this nature will be rejected immediately).
Make sure you have included your student ID and name in the front page of the assignment
Working with other fellow students is strongly encouraged. However, you cannot just copy your friend’s answers. If we find out this, you will be harshly punished for academic plagiarism. See ‘students responsibilities’ at RMIT’s policy on this:

Short Answer Questions (answer in the space provided below):
The following table depicts statistics on GDP per capita (ie, GDP/population) in column (1) and its growth rate for the country groups (column 2) defined by GDP levels (High-income, Middle-income and Low-income). They are all expressed as real (constant) GDP.
(1) (2) (3)
Country group GDP per capita (Year 2010) Average annual growth rate of real GDP per capita (Year 2000-2010) GDP per capita (Year 2088)
High-income 38,293 0.9% ?
Middle-income 3,980 4.8% ?
Low-income 507 3.0% ?
Source: The World Bank,
http://databank.worldbank.org/data/reports.aspx?source=world-development-indicatorsThroughout this question, assume constant growth rates for each of the country groups that are equal to their average value between year 2000 and 2010 (column 2 of Table). Answer the following questions (show all the calculation steps to get partial marks):
Compute the ratio of GDP per capita of the different income groups in year 2010 (expressed to one decimal point in %): (1.5 mark total-0.5 x3)
Middle- to High-income group
Workings:
Ratio of GDP per capita:
Middle-to High-income group:398038293×100%=10.39% ? 10.4%
Low- to High-income group
Workings:
Ratio of GDP per capita:
Low-to High-income group: 50738293×100%=1.32% ? 1.3%
Low- to Middle-income group
Workings:
Ratio of GDP per capita:
Low-to Middle-income group: 5073980×100%=12.74% ? 12.7%
Compute the approximate number of years it will take the Low-income and Middle-income countries to double their GDP per capita. (1 mark)
Workings:
Based on the rule of 70, Low-income countries need:
700.9 = 77.78
?77.8 years to double their GDP per capita (1 d.p.)
Based on the rule of 70, Middle-income countries need:
704.8=14.58
?14.6 years to double their GDP per capita (1 d.p.)
Approximate the GDP per capita for High-income, Middle-income and Low-income groups for the year 2088, and fill in column 3 of the Table. (1.5 mark total – 0.5×3)
Workings:
GDP per capita for High-income groups (year 2088):
GDP at 2010= $38,293, growth rate= 0.9%, years=78
GDP at 2088= $38,293×(1.009)78= $77,024.761
? $77,024.76 (2 d.p.)
GDP per capita for Middle-income groups (year 2088):
GDP at 2010= $3,980, growth rate= 4.8%, years=78
GDP at 2088= $3,980×(1.048)78= $154,192.453
? $154,192.45 (2 d.p.)
GDP per capita for Low-income groups (year 2088):
GDP at 2010= $507, growth rate= 3.0%, years=78
GDP at 2088= $507×(1.03)78= $5,085.240
? $5,085.24 (2 d.p.)
Repeat part a) of the question with the computed GDP per capita in year 2088 (1.5 mark total – 0.5×3)
Workings:
Comparison Group Ratio (in %) for year 2010 Ratio (in %) for year 2088
Middle-to-High-income
10.4% 154,192.4577,024.76×100%=200.19% ? 200.2%
Low-to High-income group 1.3% 5,085.2477,024.76×100%=6.60% ? 6.6%
Low-to Middle-income group 12.7% 5,085.24154,192.45×100%=3.30% ? 3.3%
Now compare your answers in part a) and part d). Comment on any changes occurred between year 2010 and 2088. (1.5 mark)
Comparison Category Ratio Comparison over time
Increase, decrease, unchanged
Middle-to High-income group Ratio comparison increased between year 2010 and 2088. Over time, the middle-income group has overtaken the high-income group in terms of GDP per capita.

Low- to High-income group Ratio comparison increased over time due to the differences in annual growth rate between the two income groups.

Low-to Middle-income group Ratio comparison decreased between year 2010 and 2088. Over time, the middle-income group has significantly overtaken the low-income group in terms of GDP per capita.

What is the type of unemployment in the following scenario? State the unemployment type and explain in a few sentences why it is the case.

(1 mark) After completing a complex computer programming project, Tetsuo got fired from his work. His prospects for a new job requiring a similar set of skills are good, and he has signed up with a job placement service for a programmer. He has declined offers for low-paying jobs.
Type of unemployment: Frictional unemployment
Reasonings: Tetsuo has high expectations to get a higher pay than offered. Thus, he needs time to match the jobs available with the ones that he is willing to accept.
(1 mark) When Akira and his co-workers refused to accept any pay cuts, his employer started to outsource the programming jobs to low-paid workers in another country. This outsourcing is happening throughout the programming industry.
Type of unemployment: Structural unemployment
Reasonings: As outsourcing has been happening throughout the programming industry, it shows that there has been a skill mismatch with what the business requires and the skills that workers have. By having pay cuts, it reduces the costs and the skills required by the workers. Hence, it is structural unemployment.

(1 mark) Due to the current economic slowdown, Kaneda has been laid off from his programming job. His boss promises to rehire him when business picks up.
Type of unemployment: Cyclic unemployment
Reasonings: Kaneda was laid off due to fluctuations in market demand. As he was promised to be re-employed once the business picks up, it shows that his unemployment is a result of the short-term fluctuations of the economy. Hence, it is cyclical unemployment.

Loanable funds market;
Why do you think the market equilibrium in the loanable funds market maximises efficiency? (2 marks)
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Answer: In the market for loanable funds, resources for those who demand is dependent on the supply from individuals. Hence, supply equals to demand. Borrowers are firms and people who borrow money for investment and their role is to increase economic growth. While savers are individuals who want to save and earn interest through it. Their role is to supply loanable funds.

When the market interest rate is higher than the equilibrium point, it affects borrowers as it results in a higher cost of borrowing. While savers will increase the supply of loanable funds due to a higher interest rate. Thus, the quantity of loanable funds supplied will exceed the quantity of loanable funds demanded. As a result, there will be a surplus of funds that are not loaned available (point C-B). To promote the demand for loanable funds, the interest rate will decrease to the point where market equilibrium in the loanable funds market is achieved (point A). This ensures that all the funds supplied are loaned. Allocation efficiency will thus be the highest at equilibrium point as supply equals to demand.

Suppose that in the next federal budget, the government decides to eliminate all (government) purchases that are financed by borrowing because the politicians are concerned about a budget deficit. What is wrong with this argument? Briefly discuss using the loanable fund market (no bullet points please). (2 marks)
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Answer: Assuming there is no government debt, this decision affects T-G because it results in a budget surplus where T-G>O. Where there is an increase in the supply of loanable funds available to finance investment by households and firms.
It shifts the supply curve to the right (point A to B). To meet the demand, it decreases the final equilibrium interest rate which results in the supply to decrease as households are not as willing to save with a lower interest rate (point B to C). Final quantity of loanable funds available will decrease from $180 million under the interest rate of 6% to $160 million as of 4% final equilibrium interest rate. It speeds up the economic growth and productivity as the quantity of loanable funds increases from $120 million initially to $160 million. Demand will increase as it will cost lesser to borrow due to the decrease of interest rate.

If the government purchases include essentials like education, healthcare, and military, it could be detrimental for the citizens due to a lower standard of living while affecting the economy in the long run as it may result in a slower rate of economic growth and productivity. These essentials need time to be able to reap the benefits. Hence, a budget surplus may not be beneficial in the long run.

Go to www.gapminder.org/world. In the graph shown for Y (vertical) axis select: “Child mortality (0-5 years dying per 1,000 born)”, and for X (horizontal) axis select “time”. From a list of the countries on the right-hand side bar, select Singapore, Sweden, and Venezuela. Adjust time slider on the bottom to year 1880, and then press play:
Describe the data you observe, contrasting the outcomes in the three countries. (2 marks)
Answer: While considering the first and last data, the general trend shows that child mortality has a downwards trend.

Singapore: Throughout the data, aside from the dip which started at year 1930, there has been a spike at year 1944. After which, the data starts to dip to year 2018. As compared to the other two countries, Singapore started as second in the terms of the lowest child mortality rate. While in year 2018, it has the lowest child mortality rate.

Sweden: Sweden has a gradual downwards trend with no significant spike or dip in the trend line. It started with the lowest rate while at present, it is second in terms of the lowest child mortality rate.

Venezuela: Aside from the slight spike in year 1999, the data shows that Venezuela has a gradual downwards trend which started from the dip after the year 1920. It started and ended as the country with the highest child mortality rate.

Try to provide brief explanations for these outcomes. (2 marks)
Answer: In the 1880s to the early 1900s, the standard of living was not as high, accompanied by the limited access for medical assistance and the lack of knowledge, many illness and diseases were not spotted early. Thus, treatment was not done on time. In addition, because of the lack of access to clean water back then, many families do not place great importance on water quality. This affects the quality and cleanliness of the milk supply. It results in the high child mortality rate during that period.

Furthermore, due to World War 2 in Singapore from 1942 to 1945, this not only affected the health of the children, it also affects their food supply. As a result, many children were facing food crises which eventually results in the spike of child mortality rate due to the limited access to nutrition and micronutrients.
Due to the increase in living standards over the years, increase awareness and knowledge of child mortality, access to clean water and medical assistance etc., this results in the general downward trend of the child mortality rate.

What is your prediction about how future outcomes will evolve in these countries? (2 marks)
Answer: My prediction of the overall child morality is that it can possibly go lower. As population increases, a lower child mortality rate should be pursed. It will result in an efficient replacement rate for countries like Singapore, where there is an aging population.

For Singapore and Sweden whose rate is already very low, it is possible that this rate can go even lower. By increasing the fertility rate through government initiative such as the baby bonus implemented in Singapore, it aims to promote the fertility rate. Hence, decreases the rate of child mortality rate in relation to fertility rate.

For Venezuela who has the lowest GDP per capita as compared to the other two countries, despite the high rates, it is possible that it can go lower. The role of the government is important in Venezuela. They can create campaigns to increase awareness, promote education and technological advancement etc. This will allow its citizens to have the lifesaving interventions that they require to be within their reach. If it is successfully done, the mortality rate will be lowered.