MAE203 Global Economy

Question 1

(i) Here the country A has the comparative advantage for making phones and country B has the comparative advantage of making Computers. This is since the opportunity cost of producing phones for country A (2/5) is less than the opportunity cost of making phones for country B (3/4). On the other hand, the opportunity cost of making a computer for country B (5/2) is less than the opportunity cost of making computers for country A (4/3).

(ii) Now if they do not trade country A's production of the phone is 500 and computer is 200. Country B's production of the phone is 400 and computer is 300. If country A specializes in phones and makes 1000 phones only and country B specialize in computer and make 800 computers only. Now if country A provides 500 phones to country B and receives 400 computers in return, both the countries will be able to consume more than they were previously producing and hence there is again.

(iii) Now if there is technological advancement and production changes the trade will fetch him 500 phones and 400 computers which is still more than no trade situation and hence country B will still trade with country A.

The real GDP in 2019= (14*4)+(30*2)+(30*10)= $ 416

The real GDP in 2020= (15*4)+(40*2)+(25*10)= $390

Therefore real GDP growth rate = (390-416)/416= -0.0625

Therefore real GDP growth rate is -0.0625

Now nominal GDP in 2019= (14*6)+(30*4)+(30*12)= $564

Nominal GDP in 2020= (15*7)+(40*5)+(25*14)= $655

Therefore nominal GDP growth rate = (655-564)/564= 0.16

Labour force participation rate = (12.075/13.175)= 0.91

Therefore new unemployed= 0.8+0.1 Million= 0.9 Million

The size of the labour force = 12.075+0.1 = 12.175 Million

Therefore new unemployment rate = 0.9/12.175= 0.07

iii) If corona virus suddenly disappeared, the economic activities will increase and hence job creation will rise. Therefore people will get jobs and hence unemployed people will reduce. Therefore unemployment will reduce if corona virus suddenly disappeared.

Question 2

Due to the implementation of the Jobkeeper program by the government, the government expenditure will increase and that should increase the aggregate demand for the goods and the services lead to a rise in the price and output. However, the crowding out effect may come into place due to the rise in the tax rate by the government. The government will have to source the money from the increased tax rate that will further reduce the disposable income of the consumer and hence consumption component of the aggregate demand will reduce leading to a leftward shift in the aggregate demand. Therefore overall, the AD will shift to the right side, but not equal to the size of the government expenditure. This will also increase the inflation in the economy and the unemployment will reduce.

Question 3

Therefore,

500=246+103+X+9

• X=500-(246+103+9)= 142

Therefore to make the real GDP equal to the potential GDP of the country the government expenditure should be 142 Billion USD. In that case, the government expenditure needs to be increased so that the aggregate demand for the goods and the services increases to a point where real GDP becomes equal to the potential GDP.

Due to the implementation of the new stimulus package, the use of the Euro will increase in the European area, therefore the demand for the currency will increase leading to a rightward shift in the demand for Euro. On the other hand, the supply of the currency will remain the same since the government did not take any decision to reprint money. Therefore the new equilibrium will increase the exchange value of the Euro and more currency will be in the market.

Now since the value of the currency will raise the relative value of the Australian dollar will fall. Therefore the purchasing power of the Australian currency will go down. Given that if the private savings of the country falls, the net external debt of the country will rise along with a rise in the interest rate in the economy.

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