CALM (macro ass)
I've been working on this Macroeconomics assignment for the whole week. It's on the war on Iraq. I hate the topic.
Anyway here's the outcome, I didn't do really well and I'm not proud, but at least I submited it on time:
Question 1
Describe how consumption, investment and trade combine to determine the level of national income.
Answer:
Y=C+I+G+NX. It's a circle process.
Firms receive aggregate expenditure(Y) to produce goods, pay out to private households - consumers. Consumers pay taxes to the government and in return get transfers as a part of government expenditure(G).
Afterwards, private households start consuming(C) or saving. Private and government savings combine into National Savings(S). Then, savings are available for investment(I) into firms (firms might invest into the economy as well) or investments go abroad.
Countries trade(NX=X-M: the difference between exports and imports), but NX tend to be small.
Summing up, NX combine with I, C, G and determine the level of national income.
Question 2
Is uncertainty about the conflict in Iraq likely to affect investment? What are the implications for growth in the short run and in the long run for countries such as Australia?
Answer:
War affects economic growth in the short-run and in the long-run.
- In the short-run:
1) War boosts such economies as Australian. Government expenditure increases during the war. Government finances the war, finances firms that make military goods and prepare the country for the war (aggregate demand curve shifts to the right). More people are employed, thus consumption might increase. However, during the war countries specialise in military goods, not consumer goods. These countries attract investors that want to gain from the short-run boom in the economy. In the SR the amount of investment strongly influences the level of capital stock in the steady state (or in an economy such as Australian that has almost achieved SS).The higher the investment, the higher capital stock can be achieved. This is important, because with the higher capital stock country can enjoy the higher standard of living.
2) However, as the war continues it brings uncertainty. It's hard to take sides during the war, which makes it hard for global companies to make decisions. Investors can't make a decision, so they tend to save. Thus, investors stop themselves from adding to the capital stock as the opportunity cost of investing is uncertain. This is a way to prevent them from losing money, waiting till the situation gets better and uncertainty goes away. If the war is long and government tries to produce military goods for long enough it might lead to budget deficit. Firms start to slash down the amount of employees in order to stay in business. Nevertheless, Savings are good in the LR.
- In the long-run:
Real GDP returns to the Potential GDP and the boom would be over. Potential GDP is an upwards sloping line for rich economies. Fluctuations in investments don't affect nearly SS economies greatly. However, they affect countries with lower capital stock that are highly dependant on investment (according to the law of diminishing marginal productivity of capital, it helps to generate the capital stock really fast for low-level capital stock countries). The burden of war falls mainly on poorer countries (e.g. developing countries, particularly in South America).
The War on Iraq increases oil prices; it makes shipping oil from the Middle East expensive. If the war is won by the US, it might lower the oil prices. Oil is vital for production worldwide. Production has an effect on the level of investment in the country. No one knows what the outcome of the war is going to be. That's the main cause of uncertainty among investors. War disrupts the international flow of goods, cross-border capital flows. Thus, while rich economies tend to grow in the LR (although at a lower rate, capital stock still decreases ), the economical growth rate slows down in the developing countries greatly, making it hard for them to catch up with rich economies.
Uncertainty brings great investment fluctuations in the SR, but not in the LR. This statement is true for the rich economies. However, for the poor countries the war comes at a great cost. The burden of war falls on poor countries, making the process of convergence slower.
Anyway here's the outcome, I didn't do really well and I'm not proud, but at least I submited it on time:
Question 1
Describe how consumption, investment and trade combine to determine the level of national income.
Answer:
Y=C+I+G+NX. It's a circle process.
Firms receive aggregate expenditure(Y) to produce goods, pay out to private households - consumers. Consumers pay taxes to the government and in return get transfers as a part of government expenditure(G).
Afterwards, private households start consuming(C) or saving. Private and government savings combine into National Savings(S). Then, savings are available for investment(I) into firms (firms might invest into the economy as well) or investments go abroad.
Countries trade(NX=X-M: the difference between exports and imports), but NX tend to be small.
Summing up, NX combine with I, C, G and determine the level of national income.
Question 2
Is uncertainty about the conflict in Iraq likely to affect investment? What are the implications for growth in the short run and in the long run for countries such as Australia?
Answer:
War affects economic growth in the short-run and in the long-run.
- In the short-run:
1) War boosts such economies as Australian. Government expenditure increases during the war. Government finances the war, finances firms that make military goods and prepare the country for the war (aggregate demand curve shifts to the right). More people are employed, thus consumption might increase. However, during the war countries specialise in military goods, not consumer goods. These countries attract investors that want to gain from the short-run boom in the economy. In the SR the amount of investment strongly influences the level of capital stock in the steady state (or in an economy such as Australian that has almost achieved SS).The higher the investment, the higher capital stock can be achieved. This is important, because with the higher capital stock country can enjoy the higher standard of living.
2) However, as the war continues it brings uncertainty. It's hard to take sides during the war, which makes it hard for global companies to make decisions. Investors can't make a decision, so they tend to save. Thus, investors stop themselves from adding to the capital stock as the opportunity cost of investing is uncertain. This is a way to prevent them from losing money, waiting till the situation gets better and uncertainty goes away. If the war is long and government tries to produce military goods for long enough it might lead to budget deficit. Firms start to slash down the amount of employees in order to stay in business. Nevertheless, Savings are good in the LR.
- In the long-run:
Real GDP returns to the Potential GDP and the boom would be over. Potential GDP is an upwards sloping line for rich economies. Fluctuations in investments don't affect nearly SS economies greatly. However, they affect countries with lower capital stock that are highly dependant on investment (according to the law of diminishing marginal productivity of capital, it helps to generate the capital stock really fast for low-level capital stock countries). The burden of war falls mainly on poorer countries (e.g. developing countries, particularly in South America).
The War on Iraq increases oil prices; it makes shipping oil from the Middle East expensive. If the war is won by the US, it might lower the oil prices. Oil is vital for production worldwide. Production has an effect on the level of investment in the country. No one knows what the outcome of the war is going to be. That's the main cause of uncertainty among investors. War disrupts the international flow of goods, cross-border capital flows. Thus, while rich economies tend to grow in the LR (although at a lower rate, capital stock still decreases ), the economical growth rate slows down in the developing countries greatly, making it hard for them to catch up with rich economies.
Uncertainty brings great investment fluctuations in the SR, but not in the LR. This statement is true for the rich economies. However, for the poor countries the war comes at a great cost. The burden of war falls on poor countries, making the process of convergence slower.