Download CBEB1108-Managerial Economcs

CBEB1108-Managerial
Economcs
TITLE : ECONOMY GROWTH, THE
FINANCIAL SYSTEM & BUSINESS
CYCLE
Presented by :
MALEK BIN ABU BAKAR CEC080012
MOHD TAHIR BIN WASLI CEC080020
NUR ATIQAH BT ABDULLAH PAIN CEC080030
NURUL ERNA DEWI BT MOHD SAID CEC080028
SUMITHRA DEVI A/P MOGAN CEC080038
QUESTION 1.6 – A question from Chapter 7 asked about the real
GDP and the standard of living in a country. Based on what
you read about economic growth in this chapter, elaborate
on the importance of growth in GDP, particularly real GDP per
capita, to the quality of life of a country’s citizens.
1.
A higher the GDP per capita, the higher the purchasing power is for the
citizens.
2. A higher per capita earnings normally means higher standards of living.
3. A higher income nation also contributes to improvement in technology and
improvements in human physiology.
4. A higher per capita normally means more spending in healthcare thus
resulting in longer life expectancy—higher purchasing power in medication
and treatment.
5. Economic growth in the US and western Europe has led to improvements in
agriculture technology and rising income led to dramatic improvements in the
nutrition of the average person.
6. In the US and western Europe, economic growth resulting in technical
progress in the purification of water leading to sharp declines in sickness due
to waterborne diseases.
Standard of living Standard of living generally refers to the
level of wealth, comfort, material goods and necessities.
Real GDP
Per capita
2005 (dollars)
income
Quality &
availability
of
employment
safety
45,000
35,000
Standard
of living
Poverty
rate
Infrastructure
25,000
15,000
Cost of
goods &
services
Incidence
of diseases
10,000
5,000
0
•
•
•
1920
1940
1960
1980
2000
In year 1900 – people enjoying the highest of standard of living in the world.
In that year 1900 the people suffering with diseases such as smallpox, cholera and etc.
The foods and medicine is not enough to cover for them.
The increases in real GDP per capita depend on increases in labor productivity.
Quality of Life is more subjective and intangible. The United Nations Universal
Declaration of Human Rights adopted in 1948, provides an excellent list of factors that
can be considered developed in evaluating quality of life.
freedom of
movement
Right to
human dignity
right to have a
family
right to be treated
equally without regard to
gender, race, language,
religion, etc.
Right to
education
Quality
of life
Right to rest
and leisure
right to privacy
Equal pay for
equal work
Right to pay
free choice of
employment
QUESTION 1.13 – (Related to the making the connection
on page 277) If the keys to Botswana’s rapid economic
growth seem obvious, why have other countries in the
region had so much difficulty following them?
There are a several factors had contribute to Botswana’s rapid economic growth
compare to other countries in the African region.
i.Botswana had avoided the civil wars that plagued other African countries.
ii.Good earning from diamond exports.
(Jwaneng, in Botswana, is the world's largest and richest diamond mine)
iii.The government policies - protecting private property, avoiding political
instability and corruption and allowing press freedom and democracy.
QUESTION 2.6 – An International Monetary Fund Factsheet
makes the following observation regarding stable financial: “A
sound financial system is ……. essential for supporting
economic growth.” Do you agree with this observation? Briefly
explain.
i.
Resilient, well-regulated financial systems are essential for economic and financial
stability in a world of increased capital flows.
ii.
A problems in financial systems can reduce the effectiveness of monetary policy, deepen
or prolong economic downturns, and, in case of large scale problems, trigger capital
flight or create large fiscal costs related to rescuing troubled financial institutions.
iii.
Ample international financial and trade links imply that financial weaknesses in one
country can rapidly spill over across national borders.
iv. Hence the soundness of a country's financial system is important both for the domestic
economy, as well as for its trading partners and countries with which it has financial
linkages.
QUESTION 2.9 – Consider the
following data for a closed
economy :
•
Y = $ 12 trillion
C= $ 8 trillion
G=$ 2 trillion
Spublic= -$ 0.5 trillion
T=$ 2 trillion
QUESTION 2.9 – Consider the
following data for a closed
economy :
a) Private saving
Spublic= T-G-TR
$ 0.5 trillion = 2-2-TR
TR = $ 0.5 trillion
Therefore,
Sprivate = Y+TR-C
= 12 + 0.5 – 8 – 2
= $ 2.5 trillion
QUESTION 2.9 – Consider the
following data for a closed
economy : (cont.)
b) Investment spending
Investment = Y-C-G
= 12 – 8 – 2
= $ 2 trillion
c) Transfer payments = $ 0.5 trillion
QUESTION 2.9 – Consider the
following data for a closed
economy : (cont.)
d) The government budget deficit or budget surplus
Deficit = T< G+TR
Surplus = T> G+TR
Tax = $2 trillion
G+TR = $2+$0.5
Tax < G+TR
$ 2 trillion < $ 2.5 trillion
In this case, the government spends more than it collects in taxes,
therefore it runs in budget deficit.
QUESTION 2.10 – In problem 2.9, suppose that government
purchases increases from $2 trillion to $2.5 trillion. If
the values for Y and C are unchanged, what must
happen to the value of S and I? Briefly explain.
Y = $ 12 trillion
Saving = Y-C-G
C= $ 8 trillion
=12-8-2.5
G=$ 2.5 trillion
= $1.5 trillion
Spublic= -$ 0.5 trillion
T=$ 2 trillion
Investment = Y-C-G
=12-8-2.5
= $1.5 trillion
Saving = Investment
Therefore the government runs with
balanced budget.
QUESTION 2.12 – Use the graph to
answer the following questions.
a) With the shift in the demand for loanable
funds, what happen to the equilibrium real
interest rate and the equilibrium quantity of
loanable funds?
a. The graph show relationship between loanable fund
as demand curve and interest rate as supply curve,
which supply is shown as S1 and demand as D1.
When the shift in the demand for loanable to the
right from D1 to D, the demand increase and the
equilibrium of interest rate and quantity demand will
shift equilibrium from A to C.
b) How can the equilibrium quantity of loanable funds
increase when the real interest rate increases? Doesn’t
the quantity of loanable funds demanded decrease when
the interest rate increases?
Conversely, if the real interest rate were higher than
the equilibrium level, the quantity of loanable fund
would exceed the quantity of loanable funds
demanded.
Because a higher interest rate makes borrowing more
expensive, the quantity of loanable funds demanded
falls as the interest rate rises. In other words, the
demanded curve for loanable funds slopes
downward, and the supply for loanable funds slopes
upward.
C ) How much would the quantity of loanable
funds demanded have increased if the interest
rate had remained at i1.
If the demand increase and shift to the right, the
quantity of demand will shift from L1 to L3 where the
interest rate remained unchanged at I1 and the
equilibrium will shift from A to B.
How much does the quantity of loanable
funds supplied increase with the increase in
the interest rate from i1 to i2?
With the increase of interest from I1 to I2, the quantity
of loanable will shift from L1 to L2.
QUESTION 3.7 –
Related to page 288
Risk taken by firm during recession to expanding the
business.
1. Rising the interest rate.
2. Rising of COST – e.g. increase of fixed cost and
variable cost .
3. Increase of debt – spending by firms on capital
goods & bank loan.
4. Sales declining.
Question 3.7
Cautious approach :
1. Take a holistic approach : Completely understand the
realities and possible outcomes from the current
situation.
i. External realities : Understand customers, market
conditions, competitive realities; all of the things that on
surfaces cannot control.
ii. Internal Factors: Understand organization specific
issues and challenges and realities including people,
systems, processes, infrastructure, capital etc.
Question 3.7
iii. Market realities : It is critical to understand the nature
of relationship with customers and how the market
perceive you.
iv. Outcomes : Must define what the target to achieve.
2. Spend the money and time in the most productive
manner.
3. Capture opportunities that often arise through shifting
market and customers circumstances.
4. Taking on new debt in a recessionary environment is
risky and should be approached with caution.
3.9 : Related to Solved
Problem 9-3 on page 293
• An economics student is asked,
• “How is the economy doing?
• Is it strong, or is it in recession?”
• The student answers that the economy does not
appear to be strong because inflation is high, and
energy prices are particularly high.
• What do you think of the student’s analysis?
Answer
Glossary of Economic Terms:
i.
Strong economy means
consists of the economic system of a country or other area, the labor, capital and land resources, and the
economic agents that socially participate in the production, exchange, distribution, and consumption of
goods and services of that area.
ii.
Recession means
a contraction phase of the business cycle. The National Bureau of Economic Research (NBER) defines it as
a "significant decline in economic activity spread across the country, lasting more than a few months,
normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."
iii.
Inflation means
as a sustained increase in the general level of prices for goods and services. It is measured as an annual
percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or
service.
What Causes Economic
Recession?
Here are five negative items that could cause an economic recession or even worse a
depression.
•
Dollar collapse
•
Oil rise - if the price of crude oil were to rise that would be harmful to the economy because of the fact that other prices would rise as
well.
•
Inflation - this can happen if both the dollar starts to fall and oil prices start to rise. The reason that this happens and is connected to
oil prices and the falling dollar is that these factors make it to where consumer goods are more expensive, producers have to increase
the prices of their products to make up for the increase in oil prices and to make the same profit that they were making before the
dollar fell.
•
Housing bubble - if the interest rates on mortgages raised by 2% this could actually stop people from buying houses, which would in
turn bust the housing bubble. But on the other hand if the prices of houses dropped or deflating prices, this would deflate household
wealth, meaning people would have less equity in their homes.
•
Global economy - this is where you are going to need to look at other economies other than your own to see if they are showing
signs of a recession because in some cases other countries recessions can greatly impact the other countries depending on how much
they rely on imports.
However, there is no definite answer to what causes a recession. It was all of these factors that
slowed the overall demand, which in turn resulted in a recession.
Relationship between
Inflation and Recession
•
So does high inflation cause a recession?
In a way yes, but it precedes the recession. Usually, high inflation corresponds with liquidity
creation and a booming economy. But after a while the party balloon can get no bigger and it
eventually bursts. Liquidity contracts, inflation falls and the economy contracts into a recession.
That is exactly what we are seeing now. The money supply is beginning to contract and the
economy is sinking into recession.
Conclusion
High inflation and strike in energy price could have made a material
contribution to an economy recession but the factors are not the mere
indicators for a recession
QUESTION & ANSWER
THANK YOU