Comparative Advantage in a Changing Global Economy - Assignment Example

Student’s Name: ID Number: Date: GLOBAL ECONOMY Question One: NOTE: All figures are in $US NOTE: All figures in $US Question Two: a) GDP per capita All the five countries experienced a steady growth in GDP per capita between the year 2001 and 2008. However, Australia, Russia and United Kingdom experienced a decrease in GDP per capita between the year 2008 and 2009. China and Indonesia recorded a steady improvement in GDP per capita the same period. Between the year 2009 to 2012, Australia, Russia and United Kingdom registered a positive change in GDP per capita thus joining the other two economies i.e. China and Indonesia. During the period of 2008, there was a global economic meltdown which affected most sectors of economy in developed countries such as Australia, United Kingdom and Russia among others. According to World Bank (2012) report, these economies did not perform well during this unfortunate period. Companies collapsed while other economic activities paralysed. The significant drop in GDP per capita in UK, Australia and Russia is a clear indication of how the global economic meltdown affected the world economies. Question Three: a) GDP Explanation: All economies in this particular case registered positive improvement between the 2001 and 2006. Russian GDP declined in the year 2006/2007. Between the year 2007 and 2009, Australia, Russia and United Kingdom were all affected negatively by global economic crisis. Decrease in GDP in these three economies is a clear reflection of impact of global meltdown on world economy. China and Indonesia has safeguards against the crisis hence continued to report positive change of GDP each year until 2012. Of all these economies, Australia was the worst hit by the crisis hence huge negative difference in GDP between the year 2007 AND 2008. After this period, the economy has taken desirable recovery path. b) GDP GROWTH RATE Just like earlier explanation on GDP, growth rate takes the same route. Annual growth rate represents the difference between GDP registered in different periods. Increase in GDP signifies the growth of economy as a whole. In the case of these five countries, two of them, i.e. Australia and United Kingdom reported negative growth rate between the year 2007 and 2008. The World Bank report (2012) indicates the sign of economic recovery in these countries from 2009 to 2012. The GDP growth rate started reporting positive difference. China and Indonesia maintained positive growth throughout the period even when the global crisis hit all developed economies. Australia in particular experienced slow growth rate from 2005 to 2010 which may be as a result of diminishing returns among other factors (Dyster, Barrie, and David, 67). Consequently, economists cautioned the government on the need for quick reforms in major industries and further investment in infrastructure. Before this period, this country experienced steady growth than other high income economies. c) INFLATION Inflation generally indicates overall price levels of commodities and services in an economy. When the inflation is high, cost of products rises hence reducing the purchasing power of currency in that particular economy (Dixit, Avinash, 46). Each country in this case has tried to ensure the inflation remains in desired level. China for instance has maintained low price levels of commodities until 2007 and 2008 when its inflation was higher than usual (Eichengreen, et al 73). It had the same experience in 2010 and 2011. In Australia, rate of inflation has been high except 2009 and 2012. United Kingdom has maintained low level of inflation throughout except 2008, 2010 and 2011. When the inflation is low, the country supplies most of its products thus increasing GDP. Inflation affects currency exchange in an economy hence when it is low; the currency demand is usually high hence making the GDP to be high. In such situation, the economy is said to be improving. d) UNEMPLOYMENT Strength of any economy is mainly determined by the level of unemployment. High level of unemployment indicates that there is low purchasing power within the economy hence low GDP. When people within the economy are unemployed, there is low consumption of products and services. Consequently, GDP in that particular economy is always low. Between the year 2008 and 2009, Australia, Russia and United Kingdom had high rate of unemployment. It was due to collapse of many institutions and stagnation of various sectors of economy. Most organisations lay off their employees as a measure of coping with economic crisis. Australia, Russia and United Kingdom are good examples of economies that had high unemployment during this season. China and Indonesia were not affected since their economies do not rely much on formal sector. In China particularly, the economy relies on informal sector which usually account for more than 50% of its products (Fidrmuc, Jarko, and Iikka, 299). The country also has stable and sustainable market base which is developing economies. Question Four: MPC which is marginal propensity to consumer refers to an aggregate increase in income that a consumer decides to spend on products and services instead of saving. It represents a change in level of consumption as a result of change in earning or income. When MPC is 0.7, it means that consumption increases by 70 cents whenever the income increases by an extra dollar. GDP T YD C I G NX AE UI Y will: 18000 4000 14000 7600 4500 5000 4500 21600 Increase 22000 26000 30000 34000 38000 10,000 15,400 11,000 12,000 11,000 49,400 Increase 42000 YD is the disposable income that is calculated by first determining the Gross income then subtracting all deductions including direct taxes and adding any available benefit. C stands for consumer spending or total consumption in an economy. AE is the collective spending or aggregate expenditure in an economy. It is determined by adding total consumption (C) + Government expenses (G) + Net Export (NX) + Aggregate Investment (I). UI stands for unemployment Insurance which is the amount given as compensation to the people who have lose their income in the economy. Equilibrium level of income is realised when the aggregate demand for products and services is at par with supply level in a given economy. In a nut shell, GDP expresses equilibrium income. It is expressed as GDP = C+I+GP+NX Question Five: Potential level of GDP refers to the optimum output level an economy can produce provided the rate of inflation remains constant. Potential GDP level at $ 38,000 implies that there is sustainable employment level and stable consumption in this economy. Such economy may be characterised by application of perfect measures and implementation of essential ideas from experts (McConnell, Campbell, et al 179). In this case, the government exports more products and applies restriction measures to imports. In addition, it tries to ensure employment level is high in order to sustain consumption of products and services. When the GDP level is at $ 18,000, Government expenditure and Total Investment stand at $5,000 and $4,500 respectively. This implies that the $ 9,500 is spent as stimulus package. When the GDP is at $ 38, 000, then the government spending and investment ought to be higher than in earlier case. In the latter case, the government will need stimulus package of $ 23,000 to sustain this level of GDP. The stimulus package in this case is less than change in income level since the government creates more employment opportunities while retaining the previous level. Increase in stimulus and investment implies open opportunities for employment within the economy hence increasing level of income. Work Cited: Castells, Manuel, João Caraça, and Gustavo Cardoso, eds. Aftermath: the cultures of the economic crisis. Oxford University Press, 2012. Dixit, Avinash. "Comparative Advantage in a Changing Global Economy." Comparative Advantage, Growth, and the Gains from Trade and Globalization: A Festschrift in Honor of Alan V Deardorff 16 (2011): 21. Dyster, Barrie, and David Meredith. Australia in the global economy: continuity and change. Cambridge University Press, 2012. Eichengreen, Barry, Raghuram Rajan, and Eswar Prasad. "Macroeconomic and Financial Policies Before and After the Crisis." Global Economic Crisis: Impacts, Transmission and Recovery (2012): 181. Fidrmuc, Jarko, and Iikka Korhonen. "The impact of the global financial crisis on business cycles in Asian emerging economies." Journal of Asian Economics 21.3 (2010): 293-303. Lardy, Nicholas R., and Arvind Subramanian. Sustaining China's economic growth after the global financial crisis. Peterson Institute, 2011. McConnell, Campbell R., et al. Macroeconomics. McGraw-Hill Ryerson, 2010. World Bank. Global Economic Survey. 2012 Read More