Australia, US, and UK Macroeconomic Indices - Essay Example

?Macro Economics International business is at its zenith when almost all the economies in the globe are open. Business cycles fluctuations are commonto almost all the economies in the modern world. This essay will through light on the Global Financial Crisis that had taken place in 2007-2008. The essay will discuss the impacts created by this financial crisis on different economies in the world. This part of the essay will concentrate on the growth of real Gross Domestic Product, inflation rate and unemployment rate in Australia, United States and United Kingdom. Answer 1: Figure 1: Real GDP, Unemployment, and Inflation Rates of U.S. (Source: ABS, 2013; BLS, 2012) The above graph shows the real GDP, inflation rate and unemployment rate in United States. Figure 2: Real GDP, Inflation and Unemployment of Australia (Source: DFAT, 2013; RBA, 2013) The above graph shows the real GDP, inflation rate and unemployment rate in Australia. Figure 3: Real GDP, inflation and Unemployment in United Kingdom (Source: DFAT, 2013; BEA, 2012) The above graph shows the real GDP, inflation rate and unemployment rate in United Kingdom. Answer 2: The above three line graphs show that global crisis has negatively affected all the three economies in the world. It is clearly visible that due to recession in 2007 to 2008, the real GDP of all the three economies has shown a sharp fall in 2008, 2009 and 2010. The recessionary trails in the economy were responsible for the low velocity of circulation of money in the economy. With fall in purchasing powers, the aggregate demand for goods and services has been low in the three nations. Thus, although there has been an overall growth in real GDP but the global financial crisis has lead to a fall in GDP in the short run. The crisis in the economy has reduced both the income and output levels. As a result, the unemployment rates have also augmented. Economic crisis is often associated with inflationary trails in the economy. Scarcity causes price rise in almost all the goods and services. However, with time all these three developed economies are recovering from the extreme crisis. Answer 3: A nation must always formulate policies of growth in a way that helps it to use the benefits of its core competences. In the modern era almost all the countries in the world are open economies. International trade is at its peak. At this juncture it is always advisable for a nation to produce only those goods and services, over which they have competitive advantages. This would help the nation to allocate its resources in an efficient method. While making resource allocations, the state as well as the business enterprises will always find the stock of resources to be scarce, when compared to the demand in the economy. The country in Africa is a labour surplus nation, then the public as well as the private sectors should stress on labour intensive methods of production. However, that does not mean that the nation would not undertake technological inventions. The state should adopt capital intensive techniques but not at the cost of its labour requirements. Maintaining the labour concentrated methods of production, both public and private sectors of the country would be able to generate more employment for people. A higher employment will increase both income and purchasing power of the people in the country that would ultimately help in raising the aggregate demand of the nation. Rise in aggregate demand will finally help in augmenting the GDP of the country. For economic development, technological inventions are always in race with depletion of national resources. Thus, the government of the country must adopt sustainable technological improvements to protect the rich natural reserves of the nation. As the country concerned has a free or Laissez faire economy, the government should not make unnecessary interventions in the matters of economic affairs because that would involve a fall in the net social welfare. Free forces of market demand and supply should be allowed to set most of the price levels of the goods and services. However, the government must concentrate towards welfare activities to reduce the inherent inequality in the nation in terms of both economic and non economic indicators. The state must control the monopolistic discriminations created by the private business organizations. The two key primary sources that would help to augment growth of the nation are import substitution and export promotion policies. Import substitution would help in making the domestic sectors of the country strong while export promotional policies would help the nation to achieve surplus in its balance of payment accounts (Rossana, 2011). Answer 4: Most of the corporate firms are joint stock companies in the modern era. The stock markets in different nations show the list of stock prices of different companies. The value of stock price of a company depends on the profit and revenue generated by the organization. Stock market investments are speculative expenditures; they are highly volatile and engender uncertain outcomes. Due to changes in the market forces, the stock prices changes in each day. The economic worth of stock prices of a company depends on the investor’s image about the significance of that organization. Stock markets often crash when the investors find exchange rates to be unfavourable and they expect negative uncertainties to commence in future. Economic downturns or recessions are often followed after stock market crumple. Recession is a situation when the overall spending in the economy falls. The velocity of circulation of money slows down during recession. The aggregate expenditure in an economy is the sum of total expenditures incurred in the nation. This includes consumption, investment, government expenditures and net exports (AE= C+I+G+NX). The aggregate expenditure line is a positive sloping line with a positive intercept. This is because even when the level of expenditure is null, the economy incurs minimal subsistence consumption expenses. The income of the country is denoted by the real GDP that always grows steadily in the long run. Thus, the real GDP line is a positive sloping line. Fig 4: Aggregate Expenditure and Real GDP (Source: Authors Creation) The above diagram shows the impact of stock market crash in the economy. When the stock market collapses, the investors withdraw their investments. As a result, the production capacity of business firms falls. A fall in production involves in lower employment opportunities, this finally reduces the purchasing power of the individuals. Thus, the overall expenditure falls in the economy. Economy stabilizes when the aggregate income equals to the aggregate expenditure levels. Thus, with stock market fluctuations as shown in the above graph, the aggregate expenditure line shifts downward. Given the real GDP line, a lower aggregate curve involves in reducing the output and income level in the economy. Thus, the income level falls from Y1 to Y2 and the output falls from Q1 to Q2 (Luo, 2012). Answer 5: Individuals allocate their income in three possible ways in general; these ways are consumption, savings and taxable expenditures. Thus, it can be stated that national income is the sum total of consumption, savings and tax aggregates (Y=C+S+T) in a developed economy. Thus, a change in income is only possible with a change in consumption, savings or taxes {d(Y) = d(c) +d(s) + d (T)}. If it is assumed that the change in taxes is almost null then {d(Y) = d(c) +d(s)}. By formulating the above equation it can be stated that d(C)/d(Y) + d(S)/d(Y) = 1. D(C)/d(Y), d(S)/d(Y) are marginal propensity of consumption (MPC) and marginal propensity of savings (MPS) respectively, that shows the change in consumption and saving due to changes in income level. When recession or crisis will take place in the economy, then the value of currency will depreciate. Income level in the economy will fall thus {d(Y) ? < d(c) +d(s) + d(T)}. The fall in income level will make the consumer save more and consume less in the short run. This is because the individuals will expect the income level to fall further in future. Now MPC + MPS = 1, if MPS rises then MPC +MPS > 1. So in order to maintain balance MPC will fall. Fig 5: Short Run Impact of change in Savings Propensity (Source: Authors Creation) In the above graph the blue line 450 line is the aggregate income line. The slope of the consumption curve represents the MPC. As mentioned above, due to rise in MPS in the short run the MPC will fall. Thus, the consumption line becomes flatter. The red line represents the new consumption line that shows that the income level falls in the economy. So in the short run the income level of the economy will fall due to rise in savings propensity. However, the rise in savings propensity will be beneficial for the economy in the long run. The financial institutions would be able to mobilize savings and lend it to investors in the market. This would then finally help in augmenting the level of income in the economy in the long run (Arnold, 2008). Reference List ABS, 2013. Australian Bureau of Statistics. [online] Available at: [Accessed 30 August 2013]. Arnold, R. A., 2008. Macroeconomics. Connecticut: Cengage Learning. BEA, 2012. U.S. Economic Accounts. [online] Available at: [Accessed 30 August 2013]. BLS, 2012. Labor Force Statistics from the Current Population Survey. [online] Available at [Accessed 30 August 2013]. DFAT, 2013. Department of Foreign Affairs and Trade. [online] Available at [Accessed 30 August 2013]. Luo, Y., 2012. Aggregate Expenditure and Output in the Short Run. [pdf] Available at < http://www.sef.hku.hk/~yluo/teaching/Econ1002EF/chapter11.pdf > [Accessed 30 August 2013]. RBA, 2013. Statistics. [online] Available at [Accessed 30 August 2013]. Rossana, R. J., 2011. Macroeconomics. Abingdon: Taylor & Francis. Read More