!! Macroeconomics Real Life Examples (V2)

Question 1

Limitations in calculating unemployment

Answer 1

• Overstatement: Informal economy (unregistered farming businesses in rural areas, in developing countries like Thailand and India)
• Understatement: Underemployment (2019 Britain faced record breaking low for unemployment at 4%, while people with jobs rose to 75.8%, but there was a 42% increase in the number of people in “involuntary” part-time work and would rather work full time)
• Understatement: Disparities in region, gender, ethnicity, age (2021 US unemployment rate of 4.8% failed to reflect unemployment rates of 7.5% in Nevada and California)

Question 2

Expansionary Fiscal Policy

Answer 2

US 2008 Great Recession

Details

• GDP fell from 2007 Q4 to 2009 Q2, a total decline of 5.3%

Tax

• Reduced income tax by 21% and corporate tax by 55%

Government spending

• Spent $153 billion stimulus on infrastructure eg roads, bridges
• Later in 2007, spent further $787 million on specific sectors eg healthcare, education

Pros

• Personal consumption expenditures rose by 8%

Cons

• Long decision lag ➜ Recession began in 2007 Q4, due to time lag in recognizing economic issue and 3 months for parliamentary decision by Congress, fiscal policy only implemented in 2009 Q2, 5M jobs already lost
• Unsustainable debt ➜ Pushed the US debt-to-GDP ratio from 62.6 to 82.3, raised budget ceiling to 900B, credit rating dropped from AAA to AA+, which increases cost of borrowing
• Conflicting macroeconomic objectives ➜ US COVID-19: Unemployment benefits of $600 USD per week discouraged job-seeking, unemployment rate tripled from 3.6% to 13.0%
• Unfair distribution ➜ Smaller, poorer hospitals received less federal aid
• Unable to deal with supply-side recession

Question 3

Expansionary Monetary Policy

Answer 3

US 2008 Great Recession

Pros

• Flexible, fine-tunes economy: interest rates adjusted 10 times in 2008 from 4.5% to 0.25%
• Short-time lags due to apolitical nature: early signs of recession, interest rates were decreased by the Federal Reserve from 5.25% to 4.5% before fiscal policy implementation

Cons

• Ineffective in deep recession: consumers/investors lack confidence in the future of the economy, reluctant to borrow ➜ borrowing volumes continued to fall by 79%

Question 4

Interventionist Supply-Side Policy

Answer 4

Infrastructure: HK Zhuhai Macau Bridge

Pros

• Regional transportation network: Quicker transportation from 4 hours to 30 minutes ➜ 78% of visitors who travelled via bridge expressed intent to visit Macau more frequently
• Quicker transport of raw materials: Seaport from HK to Zhuhai normally takes 1-2 days ➜ land route via bridge reduced distance to 40 km and reduced time to 75 minutes only
• Boosts tourism: Macau increased visitor numbers by 15.3% ➜ Introduced more high-spending tourists in 2019 who spent 117% more on shopping and 40% more on entertainment than seaport visitors
• Employment: Created 9290 jobs for the construction process, including technical staff and construction workers

Cons

• Opportunity cost: Totaled 127B RMB, 51.5M funded by bank loans and shared among the three governments
• Time lag: Construction took nine years, starting in 2009 and only opened to the public in 2018
• Negative production externality: Marine pollution reduced the number of dolphins in HK waters from 149 to 47
• Negative production externality: Unsafe construction conditions caused 18 worker fatalities and hundreds of worker injuries

Question 5

Market-based Supply-side Policies

Answer 5

UK Thatcher

Encouraged competition

• Introduced international banks for investments and privatization, eg Goldman Sachs (US)
• Privatization: Privatized firms like British Petroleum (1981), British Airways (1988)

Labor market reforms

• Reduced power of trade unions in the coal mining industry
• Toughened eligibility requirements for unemployment benefits and slashed their value

Incentive-related policies

• Cut top rate taxes from 83% to 60%
• Cut basic rate taxes from 33% to 30%
• Similar to US Trump who cut income taxes from 39.6% to 37% and corporate tax rates from 35% to 21% ➜ lowered unemployment rates to a 50-year low of 3.5%

Pros

• Improved productivity: British Rail passenger journeys per employee increased by 37%, total passenger trips doubled from 740 million to 1.5 billion
• Reduced prices: Telecommunication fell by 50%, industrial gas fell by 50%, residential gas fell by 25%
• Improved service quality: number of customers at risk of low water pressure fell by 99%, wasteful leaks fell by 1/3
• Individuals gained from investment: share of British citizens owning equities soared from 7% to 25%

Cons

• Higher unemployment: British Steel chopped workforce by 31.5%, from 197K in 1974 to 62K in 1984
• Decreased service quality: British Rail split into separate companies, insufficient track maintenance increased rail accidents
• Worsened poverty: Population living in relative poverty increased from 13.4% in 1979 to 22.2% in 1990 (12.2M citizens) ➜ Gini coefficient rose from 0.253 to 0.339

Question 6

Inflation

Answer 6

Demand-pull: US near-zero interest rates and $1.9 trillion aid package signed in 2021 led to 6% inflation rates

Cost-push: Arab members of OPEC imposing embargo against US + Iranian revolution disrupted global oil supply in 1980s led to 11% inflation, crude oil prices rose from $16 to $40 per barrel

Cons

• Unemployment: US unemployment rose to 8.5% after oil shock
• Inflationary spiral: Venezuela inflation 438% to 65,374% from 2017-18
• Unstable economic growth: Venezuela real GDP growth rate decreased from -16% to -20% from 2017-18

Question 6

Deflation

Answer 6

Japan: The Lost Decades deflation from late 1990s to -0.23% in 2021

Cons

• Downward deflationary spiral: Deflation persisted for over 15 years from 1991, continued worsening from 0.5% in 2005 to 2% in 2012
• Borrowers lose: Public gross debt stock from 70% of GDP to 160% of GDP from 1990 to 2002

Question 6

Economic growth

Answer 6

US: Economy grew by 37% in the 1950s, median household income increased from $3319 in 1947 to $5417 in 1959

Causes

• AD increase: low-interest loans of 1.7% encouraged borrowing to buy property
• Quantity of FOP: post-war baby boom increased population by 20% in the 1950s
• Quality of labor: College education grants to veterans led to veterans taking up 49% of college admissions in 1947

Pros

• Higher output: Exports increased from $12B in 1950 to $25B in 1960
• Low unemployment: Stable natural rate of 4.5% in 1950s
• Low inflation: Stable commodity prices leading to stable 1.7% inflation
• Higher living standards: Personal incomes almost doubled; median US family had 30% more purchasing power than at the beginning of the decade; By the end of the 1950s, US was 6% of world population but consumed 30% global G&S

Cons

• Worsen inequality: 25% of citizens lived in poverty; income of median white household was twice as high as the income of median black household
• Worker exploitation: Bracero program in 1950s gave short-term labor contracts to Mexicans, offering poor working conditions with low wages (sleep in cramped barrack-like houses)
• Environmental damage: Rapid economic growth in China caused 2.2% increase in emissions in 2022 and unsustainable air pollution ➜ 49,000 citizens in Beijing and Shanghai suffered pollution-related fatalities in 2020
• Structural unemployment due to economic growth driven by technological advancements: eCommerce industry suffered where Amazon and Alibaba employed automated warehouse systems that utilize robots, displacing warehouse workers

Question 7

Consequences of unemployment

Answer 7

• Mental health: 47% diagnosed with depression in the UK
• Opp. cost of unemployment benefits: US gave $600 unemployment benefits per week to support households during COVID19, led to lower work incentives causing unemployment rate to triple to 13% in 2020
• Lower output: HK GDP shrank by 6% in 2020
• Worsen gov budget: HK deficit of 10.6B
• Lower tax revenues: As Greece’s unemployment rate rose towards its peak of 24.5% in 2012, income tax revenues fell by more than 10%
• Poverty: HK 2020 3% increase in unemployment rate raised poverty rate by 3%
• Crime: US first 5 months of COVID19, 16 US cities experienced unemployment contributing to raising firearm violence

Question 8

Interventionist Supply-Side (Deregulation)

Answer 8

Macau: Gov ended monopoly system in 2002 and granted six casino operating licenses allowing private firms to enter the market E.g. Galaxy, Las Vegas Sands - Boosted the tourist industry and increased GDP from 73B in 2002 to 500B in 2019