MAE203 The Global Economy

What evidence does the data provide of the countries experiencing economic downturn during the crisis periods, and of the recovery process in the following years On the basis of the data collected, what similarities and differences are there in the performance of the economies Analyse critically and discuss.

Suppose you are a highly regarded international economic advisor. You have been asked to assess the possibilities of growth in an African country. It is a country abundant in labour and some natural resources. The capital to labour ratio is low. It has a free market economy. You have found that this country does not have a very strong and healthy banking system, however the political system is stable and the government does a good job protecting property rights. Assess this country's prospects for growth. Recommend two things that would enhance the 
country's growth. 

Stock market crashes are often followed by economic downturns. Using a 450 line diagram, explain how a stock market crash has the potential to lead to a recession in an economy, explain how an increase in the marginal propensity to save may affect the output level in the short-run. Is higher saving rate good or bad for an economy’s long-run growth Explain. 

Australia has faced a drastic crisis in the inflation rate in 2008. The lower rate of inflation reduces the risk of inflation of the economy and gives the economy more stimulus. In 2015, the economy of US was in the recovery phase. There was slow recovery in GDP and thus the inflation rate showed a steady increase.  The real GDP rate of Australia showed a declining trend in 2008 and 2009. Moreover, it has also showed a steady recovery in the following years. Similarly, the real GDP of UK and US also showed a declining phase in 2008-2009 and it has recovered in the subsequent years.

The unemployment rates of the three economies are almost closely similar to each other. The population growth rate of the three countries is different and so there is variation in the unemployment rate of these countries. In 2013-2014, there was crisis in the unemployment rate in Australia. The unemployment rate is showing a rising trend in this period. The crisis stage of the Australian economy was very long and many people had to leave the country in search of new job. In 2010, the economy of Australia was in the recovery phase in terms of unemployment. This will require adjustment in the exchange rate and fiscal considerations. In US, the unemployment rate has fallen very drastically in the year 2006. This is the crisis phase of the US economy.  The unemployment rate of US showed that it will take time for US to move to the recovery stage. The growth of wage of this economy also was very low. The unemployment rate depicts that the UK needs time to switch to the recovery stage. The hope of recovery of the UK economy is showing a rising trend as the unemployment level falls (Yao, Fagereng and Natvik 2015).

Being an international economic advisor of an African country like Egypt, it is very crucial to highlight the growth sector where the capital labor ratio is comparatively low. In such a country, the prices of the goods and services are determined by the consumers where the various demand and supply factors are not controlled by the government or monopolist or other higher authorities. (Nwaka, Uma and Tuna 2015).

Normally, in a labor abundant country will always try o follow the competitive advantage which will help in developing various kinds of labor intensive industries (Seshan 2014). On the other hand, in a poor economy, there is some opportunity for the development of dynamic growth which is vital for a developing country and this kind of development strategy will be regarded as a poor strategy. Moreover, more jobs will be available in the manufacturing sector and thus it will absorb the surplus labor of the economy. In such an economy, the income of the individuals will be based on the earnings of the workers and this will also help in the up gradation of the economy to a capital intensive industry (Seshan 2014)

Moreover, the comparative advantage of a country rich in resource helps in the development of those industries which are abundant in resources. Since these countries are rich in natural resources labor intensive manufacturing industry not only provides the option to attract excessive labor from rural subsistence sector but it also helps in upgrading higher value added industry (Sato and Ramchandra 2015).

To summarize, although the banking sector in this country is a bit poor due lack of education but still it can be said  that this country can soon compete with the developed countries with abundant labor and natural resources and added to that the government sector is taking proper initiative to enhance the property rights of the people.

Fluctuations in the stock market affect the economy to a large extent. A fall in share prices affects economic disruption. Stock market crash leads to recession in the economy because the stocks are regarded as the share of ownership of a particular company. Moreover, the stock market also helps in reflecting the confidence of the investors and thus helps in their future earnings. For example, the corporate earnings in the US economy are dependent on the health sector. Any disturbance in the economy will create a massive loss to the company. The declining value of the stock prices also results in loss of the investors.

Moreover, a fall in the stock price also affects the global economic growth rate. Sometimes a crash in the stock market also does not lead to a recession in the economy. It may be a warning signal for the investors (Gali and Gambetti 2015.). If the Federal Reserve exchange can help in restoring the confidence of the investors, it will help in regaining the confidence of the investors. Moreover, stock market crash also posed threat on the banking sector of the country. The stock market crash also destroyed the confidence of the investors in further investment in the stock market. There was also a fall in the trade level due to a fall in the global nature of economic downturn. When the stock market crashes, the investors will lose a much bigger portion of their wealth and they will not have enough portion of their money to spend because they have only a less amount of money with them (Farmer 2015).

In an economy, there is greater possibility of recession when there is fall in the economic growth of the country. However, if the growth of the economy is very low, there will be greater possibility of unemployment and increase in the spare capacity. According to the Keynesian analysis, if there is fall in the aggregate demand in the economy, there will be fall in the real GDP of the country. This effect of real GDP will depend upon the slope of the aggregate supply curve and thus the economy will be near to full capacity level.

 This will lead to a fall in the real GDP of the country. The aggregate demand is comprises of C+I+G+X-M, thus it can be said that if there is a sudden fall in any of these components, the economy will be in recessionary phase. The marginal propensity to consume will increase the interest rate and this will lead to a rise in the cost of borrowing and also help in increasing the saving level. Further, this will also lay impact on the spending of the consumers. The aggregate demand will also fall further because of the deflationary fiscal policy in the economy. A fall in the aggregate demand in the economy will lead to an increase in the multiplier effect (Freitas and Serrano, 2015). 

Higher savings rate will help to boost up the economic growth of the country in the long run. A higher rate of savings results in high level of output and high level of capital in the long run (Keynes 2016).

Reference List

Farmer, R.E., 2015. The stock market crash really did cause the great recession. Oxford Bulletin of Economics and Statistics, 77(5), pp.617-633. 

Freitas, F. and Serrano, F., 2015. Growth rate and level effects, the stability of the adjustment of capacity to demand and the Sraffian supermultiplier. Review of Political Economy, 27(3), pp.258-281.

Galí, J. and Gambetti, L., 2015. The effects of monetary policy on stock market bubbles: Some evidence. American Economic Journal: Macroeconomics, 7(1), pp.233-257. 

indexmundi.com 2017. Indexmundi. [online] Available at: http://www.indexmundi.com/g/g.aspx?v=66&c=as&l=en [Accessed 14 Aug. 2017]. 

Keynes, J.M., 2016. General theory of employment, interest and money. Atlantic Publishers & Dist.

Miao, J., Wang, P. and Xu, L., 2016. Stock market bubbles and unemployment. Economic Theory, 61(2), pp.273-307.

Nwaka, I.D., Uma, K.E. and Tuna, G., 2015. Trade openness and unemployment: Empirical evidence for Nigeria. The Economic and Labour Relations Review, 26(1), pp.117-136.

Sato, R. and Ramachandran, R.V., 2014. Quantity or quality: the impact of labour saving innovation on US and Japanese growth rates, 1960–2004. In Symmetry and Economic Invariance (pp. 177-208). Springer Japan.

Seshan, G.K., 2014. The Impact of Trade Liberalisation on Household Welfare in a Developing Country With Imperfect Labour Markets. Journal of Development Studies, 50(2), pp.226-243.

Sobrun, J. and Turner, P., 2015. Bond markets and monetary policy dilemmas for the emerging markets.

Statista.com. (2017). Unemployment Rate. [online] Available at: https://www.statista.com/statistics/263710/unemployment-rate-in-the-united-states/ [Accessed 14 Aug. 2017].

Yao, J., Fagereng, A. and Natvik, G., 2015. Housing, debt and the marginal propensity to consume,". Norges Bank Research Paper, pp.1-38.