Eco511 Economics For Business | Assessment Answers

Question 1

“Economic models are false and so government should ignore their predictions.” Explain, discuss and evaluate the accuracy of this statement.

Question 2

Using the economics or other literature (but not the textbook) to identify estimates of the price elasticity of demand for at least three different products. Provide full citations for the employed literature. Comment on the magnitudes of these estimates in relation to the standard economicdeterminants of the price elasticity of demand

Question 1

As per the relevant details outlined in the question, it is imperative to use Australian Bureau of Statistics (ABS) as the primary data source in order to calculate two significant macroeconomic indicators namely inflation and also the growth in the average weekly wages for period commencing from 2005 and ending in 2015. The various macroeconomic data is presented in the form of catalogues at the ABS website and a particular catalogue would highlight the data pertaining to a particular indicator.

Inflation

It is noteworthy that all the values outlined in the table above are at 31 December of the concerned year. Using the CPI data given below, inflation may be computed by deploying the below mentioned formula (Krugman & Wells, 2012).

Inflation Rate =[ (CPI_t+1- CPI_t)/ CPI_t ] *100

Based on the above formula, the following values have been computed and summarized in a tabular format.

Average Weekly Earnings ($)

The above two macroeconomic indicators can be graphically summarized using an appropriate line graph which would result in trend analysis and has been represented below.

Some of the critical observations are made below.

• The real wage growth has been positive for all the years indicated above except for 2006 and 2015.
• The inflation on account of the global economic crisis dipped in 2008-2009 but then it recovered on the back of stimulus measures taken by the government. However, after peaking in 2011, it seems that the general trend for inflation is downwards only which does not auger well for the economy and may hint as subdued demand and reduction of aggregate demand (Mankiw, 2012).
• With regards to weekly earnings growth also, the trend from 2011 is on the decline only which seems a concern for the economy as it may indicate that lack of demand for labor which may be responsible for the slowing rise of wages to an extent that the real wage growth in 2015 has turned out to be negative (Barro, 2007).

Question 2

The various situations presented below are analyzed keeping in the mind the AD-AS model.

• The situation presented here would cause the exports from Australia to increase considering hike in iron ore prices. Also, it has been highlighted that iron ore is one of important exports of the country. Assuming no other changes occur in exports and imports, this change would cause a surge in the net exports.

Further, GDP = C+ I +G + NX. Here, the rise in NX or net exports would lead to real GDP increase. Also, the rise in exports would essentially lead to higher income levels for people in general and may also result in higher expenditure by the government as fiscal position may improve(Koutsoyiannis, 2013). The net impact of these changes is in the form of increased aggregate demand which may be captured using the graph below (Krugman & Wells, 2012).

As apparent above, the real GDP increases coupled with inflation or general price rise.

As apparent above, the real GDP increases coupled with fall in prices.

• The scenario represents a higher expenditure by government due to the setting up of the broadband network nationally.

Further, GDP = C+ I +G + NX. The implementation of the above project leads to higher value of G or expenditure by the government and hence improves the overall GDP (Krugman & Wells, 2012). Government spending would also provide stimulus to the economy by enhancing the overall income levels of consumers which would spur demand and cause AD curve to shift to the right therefore highlighting higher demand which is constrained by constant supply in the short run as illustrated in the diagram below (Koutsoyiannis, 2013).

As apparent above, the real GDP increases coupled with inflation or general price rise.

As apparent above, the real GDP increases coupled with fall in prices.

References

ABS (2017), Browse Statistics, Australian Bureau of Statistics, Retrieved from https://www.abs.gov.au/browse?opendocument&ref=topBar 

Barro, R. (2007). Macroeconomics: A Modern Approach (4^thed.). London: Cengage Learning.

Dombusch, R., Fischer, S. & Startz, R.(2012).Macroeconomics (10^thed.). New York: McGraw Hill Publications

Koutsoyiannis, A.(2013). Modern Macroeconomics(4^th ed.). London: Palgrave McMillan.

Krugman, P.& Wells, R.(2012).Macroeconomics (3^rd ed.). London: Worth Publishers.

Mankiw, G.(2012). Principles of Macroeconomics (6^th ed.). London: Cengage Learning