BUS114 Introduction to Economics : Government Debt to GDP

1. Consider the table below detailing the demand and supply curves for 19-inch colour TVs  Price of TVs ($) Quantity demanded/month Quantity supplied/month 200 1,000 2,500 180 1,200 2,200 160 1,400 1,900 140 1,600 1,600 120 1,800 1,300 100 2,000 1,000

 a)  Draw a diagram based on the above table and label the equilibrium price and quantity (the diagram does not need to be to scale). 

b)  Now assume that a TV is a normal good and incomes rise. Consumers are now willing and able to purchase 500 more TVs per month at every price. Show this change on your graph and explain what has happened to equilibrium price and quantity as a result.
2. Draw the market for bananas in equilibrium. Show  and explain what would happen on your graph if at the same time i) more banana suppliers entered the market and ii) people’s incomes went up. How would this affect the price and quantity of bananas in the market?

Part B: Macroeconomics
a) Which phase of the business cycle do you think China was experiencing in 2006 based on the sources above? Why? (Hint: Consider the macroeconomic indicators)
b) From 2005 to 2006 how did components of Chinese Aggregate Demand change according to the sources above?
c) Assume that the Chinese economy was at full employment in 2005. Demonstrate using graph what would have happened in the economy in 2006 to aggregate demand and how this would affect price level and real GDP. Explain your answer.
d) Go to the following website (https://tradingeconomics.com/china/indicators) and find China’s current macroeconomic indicators for 2017. Based on China’s inflation, GDP annual growth rate, unemployment rate and any other relevant statistics, what phase of the business cycle is Chinacurrently going through in your opinion? Support your answer with economic theory.

Part A: Microeconomics

Answer 1

 

Equilibrium is obtained at the intersection of demand and supply curve. From the above demand and supply, schedules demand and supply matches at a price of $140 and corresponding quantity is 1600. Therefore, equilibrium price is $140 and corresponding equilibrium quantity is  1600.

1. b) Table 1: New demand schedule for an increased income

In case of a normal good, a rise in income leads to a rise in demand. This rise in demand is reflected from a rightward shift of the demand curve (Fine 2016). After people purchase 500 more TVs at every price, the demand curve will shift from DD to D1D1. Corresponding to this the new equilibrium is set at a higher price and higher quantity. The new equilibrium price is $160 and the new equilibrium quantity is 1900 TV sets.

Answer 2

1. In figure 3, DD denote the initial market demand curve for banana and SS is the market supply curve. E is the equilibrium point in the market as obtained from the intersection of DD and SS. The equilibrium price is P* and corresponding equilibrium quantity is Q*.

Now when more suppliers entered in the market then supply of banana in the market increases. This causes a rightward shift of the supply curve (Kolmar 2017). The supply curve shifts from SS to S₁S_1.  The new equilibrium point is E_1, occurs at the intersection point of DD and S₁S_1. The increased supply pushes prices down and price decreased from P* to P_1. The equilibrium quantity increased from Q* to Q_1.

1. When people’s income went up, then they are able to purchase more banana at the given price. This means at every price demand for banana goes up (Bernanke, Antonovics and Frank 2015). This results in an outward shift of the demand curve. The demand will shift from DD to D₁D Given supply, the new equilibrium point is E_1.  Corresponding to this new equilibrium point a higher price (P₁) and a higher quantity (Q₁) is obtained.

Part B: Macroeconomics 

1. Business cycle shows the fluctuations that an economy faces over a period of time. There are four phases of business cycle and these are expansion , peak , recession and trough. During the expansion phase economy began to expand and achieve rapid growth (Galí, 2015) (Gilchrist  and Zakrajšek, 2012). Peak phase shows that economy’s growth reaches its maximum output. During the recession period , economy began to contract and growth becomes slow and finally the trough period shows that economy hits low point in growth and from this point economy begun to recover.

In the context of China, the macroeconomic indicators of the country in 2006 indicates that Chinese economy is in expansion phase and this is due to the fact unemployment during 2006 begins to fall while the inflation figure shows that in the later part of 2006 began to rise . Thus the economy during 2006 was recovering.

1. Aggregate demand shows the total demand of goods and services in an economy within a particular market. The four components of aggregate demand are : consumption, investment, government spending and net exports.

Among the four components, Chinese aggregate demand shows that factor that affect investment is business confidence. Business confidence shows the degree of confidence of firms about the economy and its future growth and depending upon this confidence these firms undertake investment in capital, new projects and machineries. The period from 2005 to 2006 shows that level of business confidence increased within the economy, initially in 2005 it was low but from the second quarter of 2006 the level of business confidence begun to rise. From another component of aggregate demand which is net export, it has been observed that from 2005 to 2006 the level of net export increased. Initially export level dropped in 2005 but then it begun to rise in that that particular year but in the second quarter of 2006 it has been observed that export level again dropped, however after that period the export level begun to rise at an increasing rate.

1. Full employment is an situation which shows that the available labor are being used efficiently (Tcherneva, 2012). Now in the context of Chinese economy if the economy is at full employment in 2005, then the period 2006 impacts economy’s inflation rate, and the effect is shown below.

The diagram above shows that the economy is at full employment. Here AS is the aggregate supply curve and AD is the aggregate demand curve. Yf is the level of full employment. With full employment, the price level increased from P1 to P2 and this happened due to shift to demand curve to the right from AD0 to AD1, here the output level i.e, the GDP remained the same.

Due to full employment in 2005, inflation rises in 2006 and as a result of this rise workers have more disposable income and price level will increase. As price increases, GDP will not increase (Pollin, 2012).

1. Macroeconomic indicators of 2017 for Chinese economy are :

• GDP growth rate
• Unemployment rate
• Inflation rate
• Interest rate
• Balance of trade
• Government debt to GDP

Looking at the figures of macroeconomic indicators of China it has been observed that the economy is in trough phase, this is due to the fact economy shows unemployment is falling in 2017, but the inflation rate is rising. On the other hand, balance of trade is also falling from previous year. GDP growth rate is also slow. Thus all the values of the indicators show that the economy is experiencing the recovery phase of the business cycle (Sherman, 2014).

References

Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-Hill Higher Education.

Fine, B., 2016. Microeconomics. University of Chicago Press Economics Books.

Galí, J., 2015. Monetary policy, inflation, and the business cycle: an introduction to the new Keynesian framework and its applications. Princeton University Press.

Gilchrist, S. and Zakrajšek, E., 2012. Credit spreads and business cycle fluctuations. The American Economic Review, 102(4), pp.1692-1720.

Kolmar, M., 2017. Introduction. In Principles of Microeconomics(pp. 45-53). Springer, Cham.

Pollin, R., 2012. Back to full employment. MIT Press.

Sherman, H.J., 2014. The business cycle: growth and crisis under capitalism. Princeton University Press.

Tcherneva, P.R., 2012. Permanent on-the-spot job creation the missing Keynes Plan for full employment and economic transformation. Review of Social Economy, 70(1), pp.57-80.