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This assignment is based on an article published in the Economic Focus section of The Economist Magazine called .The Global Slumpometer., November 6,2008. The article is already attached to this assignment question. Please read the article arefully before attempting this exercise. You will also need to draw on other resources available through the library as well as external resources to answer these questions.
Questions: Answer all questions. Limit the word count of your assignment to less than 3000.Please use diagrams in your answer when appropriate.
1. In light of the recent turmoil in global financial markets, many countries have implemented.rescue. packages for ailing financial institutions. Does this mean that Adam Smith.s .invisiblehand. view of the economy is now redundant? Discuss.
2. The article suggests that the downturn will impact the wealthier countries more than poorer nations. Will this recent crisis impact all developing countries in the same way? Research and analyse.
3. Recently, the Australia government has unveiled measures aimed at insulating Australia from the fallout of these global events. Using the AS/AD model, analyse the intended effects of these fiscal measures. What should be the role of monetary policy given these events?
4. The value of the Australian dollar has declined during this crisis, even though our economic fundamentals are better than most countries. Discuss the likely causes of our currency.s depreciation.The Essay is provided by UK Assignment http://www.ukassignment.org
5. Briefly discuss the likely effects of these global events on....(i) the Australian retail sector (ii) the Australian housing market (iii) the Australian mining industry.
The global slumpometer
Nov 6th 2008
From The Economist print edition
Rich countries face their deepest recession since the 1930s. For poorer nations it could still be relatively mild
MANY economists are now predicting the worst global recession since the 1930s. Such grim warnings discourage spending by households and businesses, depressing output even more.It is unfortunate, therefore, that there is so much confusion about what pundits mean whenthey talk about a .global recession..
America, Britain, the euro area and Japan are almost certainly already in recession
according to the popular rule of thumb of two successive quarters of falling GDP. But is theR-word really justified for the world as a whole? In an updated World Economic Outlook,published on November 6th, the IMF predicted that world GDP growth would fall to 2.2% in2009, based on purchasing-power parity (PPP) weights, from 5% in 2007 and 3.7% in 2008.In the past, the IMF has said that global growth of less than 3% implied a world recession,so its latest forecasts would push the world over the edge. Some forecasts by private-sectorfirms are even gloomier, with several now predicting global GDP growth of no more than1.5% in 2009. The Essay is provided by UK Assignment http://www.ukassignment.org
But why does the IMF think that a world economy growing by less than 3% a year is inrecession? To many people, growth of 2.9%, say, sounds pretty robust. Surely a drop inoutput is required? The trouble is that there is no agreed definition of a global recession.The popular benchmark used in developed economies.two successive quarters of decline.is not helpful when looking at the world as a whole, because many emerging economies donot report seasonally adjusted quarterly GDP figures. Also, downturns are rarely perfectlysynchronised across countries, so even if most countries contract at some stage during atwo-year period, global GDP growth may not turn negative. Indeed, global GDP has neverfallen in any year since the 1930s Depression. Its worst years since then were 1982 and1991, with growth of 0.9% and 1.5% respectively (see left-hand chart).
World growth also needs to be adjusted for rising world population. The IMF suggests that asufficient (although not necessary) condition for a global recession is any year in whichworld GDP per head declines. In each of the downturns in 1975, 1982 and 1991, growth inworld GDP per head turned negative. By contrast, in 2001, despite much talk of .the motherof all recessions., global GDP per head expanded by around 1%. The annual growth rate inworld population has now slowed to 1.2%, so recent GDP forecasts would still allow averageworld income per head to rise.
If market exchange rates are used to measure world output instead of PPPs, then somerecent forecasts would imply a fall in world GDP per head. However, the IMF believes that PPP weights are more appropriate, because a dollar buys a lot more in poor countries than in America, thanks to lower prices. Converting China.s GDP into dollars at market exchange rates therefore understates the true size of its faster-growing economy and, in turn,understates world growth.
The IMF.s definition of global recession also takes account of the fact that the trend growth rate in emerging economies is higher than in developed ones, so even a steep downturn will leave GDP still expanding. A growth rate of 4% would count as a boom in America, but a recession in China. Nevertheless, some economists reckon that the IMF.s 3% benchmark for global recession may be too high. UBS, for instance, suggests a demarcation point of 2.5%.Even the IMF now seems less sure. At the original launch of the World Economic Outlook in October, Olivier Blanchard, the fund.s chief economist, said .it is not useful to use the word.recession. when the world is growing at 3%.. The Essay is provided by UK Assignment http://www.ukassignment.org
When tracking such diverse economies, it does make much more sense to define a global recession not as an absolute fall in GDP, but as when growth falls significantly below its potential rate. This can cause anomalies, however. Using the IMF.sdefinition (ie, growth below 3%), the world economy has been in recession for no fewer than 11 out of the past 28 years. This sits oddly with the fact that America, the world.s biggest economy, has been in recession for only 38 months during that time, according to the National Bureau of Economic Research (the country.s official arbiter of recessions), which defines a recession as a decline in economic activity. It is confusing to have different definitions of recession in rich and poor economies.
Growing apart
Before proclaiming global recession, it is also important to consider the extent to which adownturn has spread around the world. As stockmarkets and currencies have slumped in emerging economies and some governments have had to knock on the IMF.s door, it might appear as if these economies are being hit harder than rich countries. Even in China, growth seems to be slowing sharply, prompting the government to lift its quotas on bank lending at the start of this month. Yet most emerging economies are still widely expected to hold up much better than in previous global downturns.
It is only really the developed world that faces severe recession (see right-hand chart). The IMF.s revised November figures now forecast that the advanced economies will shrink by 0.3% in 2009, which would be the first annual contraction since the war. The IMF has become markedly more bearish on emerging economies since October, revising its forecasts downward by an average of a percentage point. But emerging economies are still tipped to grow by around 5%. This is a sharp slowdown from recent growth of 7-8%, but still above their average growth rate over the past three decades and considerably higher than their typical growth in previous global downturns.
These numbers could of course, be revised down still further. But if broadly correct, this could be a relatively mild downturn for emerging economies. Real income per head is still expected to increase next year in countries that account for well over half of the world.spopulation. Indeed, if the developed world as a whole suffers an absolute decline in 2009,next year is set to be the first year on record when emerging economies account for morethan 100% of world growth.
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