Macro economic Objectives
Graded Assignment.
Grade 12 HL2
Research the current economic situation in the country allocated to you. What seems to be the biggest problem facing policy makers? What mix of policies do you think would be best suited to dealing with the problems? Evaluate what might be some effects on other economic objectives of enacting policies.
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Word count 500 words minimum.
Last date submission Sunday, January 11th,2015.
Grade 12HL2
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1
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Agarwal Ruchir
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India
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2
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Arshiwalla Hussain
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Brazil
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3
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Bhatia Aryamika
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Bangladesh
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4
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Bhogilal Hradini
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Mexico
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5
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Desai Gaurangi
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Egypt
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6
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Faizullabhoy Zahra
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Iran
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7
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Ghai Shivaan
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UK
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8
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Goenka Anandita
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South Korea
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9
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Goenka Shrivar
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Israel
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10
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Harthiramani Tanya
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Saudi Arabia
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11
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Issa Faisal
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Venezuela
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12
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Jatia Tanisha
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Norway
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13
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Jhaveri Anaya
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Australia
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14
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Kasbekar Arnav
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Denmark
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15
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Oeroi Jahaan
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Sri Lanka
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16
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Patel Reha
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Netherlands
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17
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Shah Adiva
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Belgium
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18
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Rohan Lodah
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Portugal
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7 comments:
Zahra Faizullabhoy- Iran
During the period of 2013 and early 2014 Iran experienced months of stagflation, thus suffering negative economic growth accompanied by rising inflation rate. However recently Valiollah Seif, governor of Central Bank of Iran stated that the economic situation in Iran was on the “mend”. He predicted economic growth of 3% for the country this year. The economy expanded 4.6% in the first quarter of the Iranian calendar leading to further predictions that Iran will grow 1.5% in 2014 and 2.3% in 2015. Inflation rate which was very high at 23.2% at first is now slowly decreasing and the Iranian administration aims to reduce the inflation rate to a one digit level. The main reason for economy being slowed down in previous times were Price controls, subsidies and some other rigidities. Now amends are being made.
One of the major issues policy makers in Iran are facing is the “protracted water crisis”. In 2013, the government of Iran called for water conservation and efficient use of water. However, despite imminent shortages, there has still ben inefficient use of water. Domestic use of water is 70% higher than the global average. Out of the 75 million population 12 reside in the capital and thus demand of water is rapidly increasing. Water insecurity is increasing due to more frequent drought and population growth. The water crisis is overshadowed in global current affairs by Iranian Politics and negotiations over the nuclear programe, but the government confirmed the water crisis is the biggest problem looming over the State. The water crisis is affecting the economy in a big way as government is being made to spend large amounts of money on water. The other problems facing the economy are high unemployment, anemic growth, rising consumer prices and deteriorating business climate. The unemployment rate is abut 15% and inflation rate is near 20%. Food price inflation is exceeding 50%. Another big problem is that the United nations will stop imposing sanctions. A subsidy reform program introduced by the Ahmadinejad administration backfired thus the value of Iran’s currency declined steeply.
The Resistance Economy doctrine is one policy that is aimed at making the Iranian economy resistant to all external economic shocks in the long term, such as global financial crises as well as western sanctions. Another policy in the making is to boost the foreign investment so that the energy sector is developed as well as a “knowledge economy” around it’s technology sector. This will lead to a fundamental transition away from a state dominated economy. Iran also aims to reform the domestic financial market, establish a self-sufficient system for capital flow and reduce vulnerability to global crises by preventing integration with the international financial system.
Water reforms must be made as well in order to get that major problem under control. President Rouhani also proposed dramatic fiscal tightening in the New Iranian year. Iran also aims to move to a “very austere budget” in order to keep the economy stable.
Belgium is among the most highly industrialized countries in Europe. Poor in natural resources, it imports raw materials in great quantity and processes them largely for export. Exports equal around two thirds of GDP, and about three-quarters of Belgium's foreign trade is with other European Union countries.
The Gross Domestic Product (GDP) in Belgium expanded 0.30 percent in the third quarter of 2014 over the previous quarter. However, inflation rates have been reducing since 2011. After the all time high 3.53% inflation in 2011, it has now reached 1.11%, resulting in disinflation.
Belgium's stability programme sets out the fiscal policy stance and targets for the period 2014-2017. In order to combat the disinflation in the country, the government is using fiscal policies. Fiscal policy refers to manipulations by the government of its own expenditures and taxes to influence the level of aggregate demand. Fiscal policy undertaken to eliminate a recessionary gap is called expansionary fiscal policy, because it works to expand aggregate demand and the level of economic activity. Expansionary fiscal policy may consist of: increasing government spending, decreasing personal income taxes , decreasing business taxes, or a combination of increasing spending and decreasing taxes. While the fiscal policies used may work, there are many setbacks to the use of these policies:
Fiscal policy is subject to a number of delays in timing called time lags. There is a lag until:
• The problem of disinflation is recognized by the government authorities and economists
• The appropriate policy to deal with the problem is decided upon by the government
• The policy takes effect in the economy. Some months may pass, and by the time the policy action has taken effect the problem may have become less or more severe, so that the policy action is no longer the most appropriate one.
Government spending and taxation face numerous pressures that are unrelated to fiscal policy. Spending for social services (merit goods such as health care and education) and public goods is undertaken for its own sake and cannot easily be cut if a contractionary policy is required. On the other hand, tax increases are politically unpopular and may be avoided by the government even though they might be necessary. Tax decreases could also be inappropriately enacted because they are politically popular. The upshot is that political factors may sometimes lead to unsuitable fiscal policies.
However, monetary policies could also be used to lift the economy from disinflation. This is carried out not by the government but by the central bank of Belgium. It includes changing rates of interest and/or money supplies. The point of changing the money supply so as to change interest rates is ultimately to influence aggregate demand. The central bank aims at changing interest rates to influence the I (investment) and C (consumer expenditure) components of aggregate demand. In a recessionary gap, the central bank may pursue an expansionary (easy monetary) policy through lower interest rates to encourage I and C spending, the objective being to shift the AD curve to the right leading to equilibrium at the full employment level of real GDP (potential GDP).
However, even these policies have a disadvantage of time lags and government opposition.
It is in the best interest for Belgium to evaluate both types of policies and see which one would give a better result in both the long and short term.
The economy of Venezuela entered a recessionary period in 2014. Its economy contracted for 3 consecutive quarters. A recession is a period of economic contraction, where there is falling real GDP (negative growth) and increasing unemployment of resources, which last six months or more. As the GDP fell for 3 consecutive quarters (by 4.8%, then 4.9% and lastly 2.9%), it can be said that Venezuela is facing a recessionary period.
In addition to this, Venezuela has one of the highest inflation rates in the Americas. Its monthly inflation rate in November (2014) was 4.7%. While inflation hit 63.6% in the 12 months to November. Inflation is a sustained increased in the general price level of goods and services.
Official figures also suggested that Venezuela’s balance of payments posted a surplus of $6.8 billion by the end of the third quarter, with a current account surplus of $899 million, and the capital account showing a deficit of $568 million.
The recession is attributed to a variety of factors. Venezuela’s socialist government blames political opponents, who protested in the streets 5 months ago, for damaging the South American OPEC nation's economy. It stopped the correct distribution of basic goods to the population, as well as the normal development of production of goods and services. Another major factor was the fall in the price of crude oil. Venezuelan crude has dropped to $48 per barrel, compared with $96 in the middle of 2014. This was devastating for Venezuela whose oil exports contribute to a majority of the countries GDP.
To deal with the recession, Venezuela is planning on implementing a recovery plan. Its key actions are:
1. Fiscal reform to increase the amount raised in taxes.
2. Increase social spending and productive investment.
3. The strengthening of international reserves
4. The establishment of price controls
5. Initiatives for investment and economic growth in different areas of national production.
6. Initiatives to address the savings and excess liquidity (in bolivars) in the productive sector as an anti-inflationary strategy.
7. The establishment of special economic zones along the Colombian border and oil producing areas
As can be seen, Venezuela is attempting to implement fiscal, monetary and supply side polices.
The major problem Venezuela faces is that they cannot curve inflation without worsening the recession, and the economy cannot move away from the recession without increasing inflation. Therefore looking at these polices it can be seen that the country is trying to use a contractionary monetary policy to reduce the inflation, while using supply side polices (trying to diversify production) and a expansionary fiscal policy to deal with the recession.
Venezuela lack of diversity in its production was the main cause of the recession. As it is highly reliant on the export of oil, changes in the price of oil result in dramatic shifts in the AD of Venezuela. Therefore its primary efforts should be to diversify production using supply side policies. The government has planned interventionist supply side policies in the form of increased social spending (point 2) on human capital (health care and education). Also through the use of industrial polices (point 5), such as supporting infant industries. The government is also planning to use market based supply side polices such as the implementation of special economic zones which encourage competition. Supply side policies are extremely effective in increasing the potential output of the country. However they suffer from time lags. They are also likely to reduce inflationary pressure in the long run, as they cause rightward shift in the LRAS curve. However none of these polices are aimed at reducing recession in the short run. It seems as if the Venezuelan government is hoping for a rise in the price of crude oil, therefore increasing their real GDP and are instead focusing on social equality and reducing inflation.
The government is trying to reduce inflation by using monetary policies. They are attempting to implement more price controls by the implementation of a price ceiling. However these will lead to the development of a black market. Also by addressing savings and excess liquidity. The advantage of using these polices are that they are easy and quick to implement thus will have quick results. As they are linked to the central bank, the bank will only use policies that are beneficial to the economy in the long term. There are also no political constraints. However the effectiveness of these policies maybe limited due to the recession. The use of price controls will only worsen the problem, as the increase in the black market will reduce the AD plunging Venezuela into a deeper recession. The central bank should implement changes in the interest rate instead to deal with the recession.
The fiscal policies planned are mainly expansionary and deal with the movement out of the recession. They involve an increase in the public spending. However these measures will only aggravate the inflation, as it will lead to a rightward shift in AD. They are also planning to implement higher personal taxation. These will reduce spending and make the recession worse. This measure is being used to satisfy the objective of equality, by the socialist government.
The problem faced by the Venezuelan government is a unique as it cannot deal with the recession without worsening the inflation and vice versa. Furthermore it is a socialist government and is trying to aim for equality, and thus might implement measures that worsen both the recession and inflation. I feel that the government should use deflationary monetary policies to deal with the high inflation, while using supply side polices to move out of the recession in the long term. It should first deal with the high inflation and then move on to deal with the recession. By using supply side policies aimed at diversification it will prevent a similar situation occurring in the future.
Australia has had unprecedented growth in GDP since December 1991 and avoided both the 1998 Asian financial crisis and the global financial crisis in 2008, without a recession. Compared to most of the OECD (Organisation for Economic Co-operation and Development) countries that have suffered increases in unemployment and long-term unemployment since then, Australia has powered ahead.
As the commodity boom has come to an end, the Australian economy has slowed down but has not gone into a recession. It is certainly not in crisis. On important macroeconomic indicators, including GDP, unemployment, inflation, Current Account Balances, and debt, Australia compares very favourably. Australian GDP has been growing consistently, and Australian unemployment rate has been consistently lower than most OECD economies since the Global Financial Crisis.
Australia has the lowest debt (measured by Gross Financial Liabilities) in the OECD. In 2013, Australia’s Debt to GDP ratio was 34.4 %, Germany was 80.9 %, the UK at 111.6 %, USA at 106.5 % and the OECD average was 112.0 %.
Even Germany took until the end of 2012 to catch up with Australia. Some of the OECD countries have been concerned about deflation, but Australia has managed to go through the crisis with negligible inflation. Australia has had current account deficits (CAD) for more than a hundred years, except for very brief spells of a surplus. However, since the GFC, only Germany and Italy have had lower CADs.
However, the Coalition government has been arguing that the economy is in dire straits and is going to collapse because of a large budget deficits and a ballooning government debt. It is threatening to cut back on welfare, health, education, and the public service. These mirror austerity measures that have failed to return many OECD countries back to growth. But the same time it wants to abolish the mining tax and the carbon tax: one set of policies to hit the poor and another to help the rich.
Given the announcement of cuts back on government expenditures at a time the economy is slowing, recent proposals to introduce an income tax - or deficit levy - would lead to an even greater fall in aggregate demand and increased unemployment.
THE MINING PROBLEM
After growing very strongly over recent years, mining investment appears to have fallen by around 10 per cent from its peak a year ago. At the same time, investment by non-mining firms remained weak in an environment of relatively subdued demand and profit growth. Ongoing fiscal restraint resulted in only a slight increase in public demand.
The latest mining boom is characterised by an expansion in foreign demand for
Australian commodities, which, together with falling import prices, has translated into a dramatic improvement in the terms of trade. To some extent, this is different from some previous booms, which resulted from discoveries of deposits and put downward pressure on commodity prices. But whether a minerals boom arises from a new discovery or increased foreign demand for Australian resources, increased national wealth will lead to increased domestic spending on goods and services over time. With close to full employment, increasing the supply of non-traded goods (services) will require expansion of that sector relative to the traded goods sector.
Put another way, domestic production of traded goods has to make way for Australian increased consumption of non-traded goods. This shift is accommodated by ‘real appreciation’ — effected either through domestic inflation or nominal exchange rate appreciation, or some mix of the two. In essence, the real appreciation makes domestically produced traded goods more expensive relative to their foreign counterparts, reducing both domestic and foreign demand for them.
In addition to this demand-side effect, on the supply side, expansion of the minerals sector will directly draw some resources from other sectors. This can further impact on other traded sectors as well as on some non-traded ones, depending on their factor requirements — for example, specific labour skills.
But the pressures being placed on Australian traded goods sector are mainly due to Australia being richer than ever before and thus consuming more goods and services, rather than because mining draws labour or capital from manufacturing and agriculture. In this respect, the rapidity and scale of the income growth associated with the boom has served to amplify underlying structural trends.
This adjustment process has been variously referred to as the ‘two-speed economy’. This label suggests a policy problem, requiring government intervention to reverse or dampen the structural adjustments required by the resource boom. But it is important not to lose sight of the fact that these economy-wide impacts unambiguously raise Australian national wealth.
Bibliography
http://www.cnbc.com/id/102302389#.
http://www.businessinsider.in/Its-Official-Venezuela-Has-Plunged-Into-Recession/articleshow/45697761.cms
http://www.reuters.com/article/2014/12/30/venezuela-economy-idUSL1N0UE1FY20141230
http://venezuelanalysis.com/news/11122
http://venezuelanalysis.com/news/11133
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