Understanding CPI And GDP, And The Impact Of AD And AS On The Economy

What is CPI and how is it calculated in NZ?

Explain what CPI measures.

A government will use Consumer Price Index to measure inflation. Inflation is the overall rise in price or cost of goods and services in a given economy. It is also the average variation of prices over time rewarded to a persistent market basket of consumer goods and services. The change out of hundred in CPI is used to measure the Inflation (Bernanke, Laubach, Mishkin, & Posen, 2018).

How CPI is calculated (Rossanty, Hasibuan, Napitupulu, Nasution, & Rahim, 2018).

CPI = Where P2 is the price of goods and services in a given year

                                          P1 is the price of goods and services in the base year.

Q2. GDP

1. Use the data to calculate the value of Gross Domestic Product (GDP). Show your workings.

						$m
Compensation of employees	18 900
Gross operating surplus	15 700
Final government consumption expenditure	6 200
Final household consumption expenditure	23 100
Changes in inventories	1 300
Gross fixed capital formation	9 500
Taxes on production and imports	4 500
Subsidies	600
Exports	13 300
Imports	15 100
Statistical discrepancy	200

GDP = Total National Income + Sales Taxes + Depreciation + Net Foreign Income

GDP = 18,900+15,700+9,500+13,300-15,100-600

         = 41,700

1. Complete the table indicate whether or not the situations are included or excluded during calculation of GDP.

Situation	Included or Excluded (in the calculation of GDP)
(i)     The voluntary work of a group in cleaning up a local reserve.	Excluded
(ii)    Activities of the underground economy.	Excluded
(iii)   The purchase of alcohol for a party.	Included
(iv)   The money spent on cleaning up the mess resulting from a road accident and hospital care for injured passengers.	Included
(v)    The proceeds from illegal activities that do not go through a market.	Excluded
(vi)    Spending by the government on new motorways out of all the main centers.	Included
(vii)   A student renting a video for the weekend.	Included
(viii)  Non-market activity such as growing your own vegetables or paving your own driveway.	Excluded
(ix)    A business upgrading its computer network.	Included
(x)     An electrician does the wiring for his neighbor (a plumber) in exchange for unblocking his drain, i.e. payments in kind.	Excluded
(xi)    A builder build a block of flats.	Included
(xii)   Paying for electricity.	Included

Give two reasons why the official figures for National Income (GDP) may understate the true level of economic activity. (2 marks)

1. It does not include non-market activities
2. It does not include illegal activities for instance smuggling.
3. Why is GDP calculated in both real and nominal terms? (1 mark)

In order to cater for inflations in an economy or differences in price level

1. What does Real GDP per capita show? (1 mark)

It’s the overall monetary production of a country over the total population after the inflation has been taken care off.

1. Explain two limitations of Real GDP per capita as a measure of a country’s economic well-being(Chang, Gupta, & Miller, 2018). (2 marks)
2. It only measures production of goods and services in a legal market.
3. It does not include benefits derived as a results of rise in leisure time.

SECTION B.

1. Use your knowledge of the AD determinants to indicate the direction the aggregate demand curve will shift for the situations given in the table below. If the aggregate demand curve does not shift place a cross (X) in the space provided

Situation	Direction that AD shifts inward or outward	AD curve does not shift place a cross (X)
(i)	Income tax rates decrease	OUTWARDS
(ii)	A rise in business confidence	OUTWARDS
(iii)	A larger than expected budget surplus	INWARDS
(iv)	Interest rates rise as the OCR is raised	INWARDS
(v)	The government announces that GST will increase in six months time		X
(vi)	New technology	OUTWARDS
(vii)	Costs of production fall	OUTWARDS
(viii)	A fall in business confidence	INWARDS
(ix)	Transfer payments are increased	OUTWARDS
(x)	Next exports $1 912m surplus	OUTWARDS
(xi)	The Reserve Bank Governor lowers the OCR and interest rates fall	OUTWARDS
(xii)	Contractionary fiscal policy	INWARD
(xiii)	A net migration loss		X
(xiv)	A budget surplus	INWARDS
(xv)	A large increase in households starting to save for their retirement	OUTWARDS
(xvi)	Consumers go on a spending spree fearing price rises in the future	INWARDS

Use your knowledge of the AD determinants to indicate which direction the aggregate supply curve will shift for the situations given. If the aggregate supply curve does not shift place a cross (X) in the space provided

Situation	Direction that AS curve will shift inward or outward	AD curve does not shift place a cross (X)
(i)	New technology is developed	OUTWARDS
(ii)	Workers’ productivity falls as machinery wears out and depreciates	INWARDS
(iii)	Workers’ wages rise	OUTWARDS
(iv)	New Zealand dollar appreciates resulting in a fall in the price of imported raw materials	OUTWARDS
(v)	The government runs a budget surplus	INWARDS
(vi)	Rising oil prices	INWARDS
(vii)	An increase in investment spending by firms	OUTWARDS
(viii)	Household incomes fall	INWARDS
(ix)	An increase in GST	INWARDS

2017 and 2018 figures for NZ show that net migration is increasing. Keeping this fact in mind. Show the impact of this on the economy. In your answer you should:

1. Draw and fully label an AD/AS model to show the effect of migration changes.

1. Explain the changes to the AD and AS curves (6 marks)

In the short run, the short run aggregate curve shifts outwards, the price level goes down. When the wage rate remains constant the GDP rise (Romanowska & Smith, 2018).

1. Assume that an economy is operating at a moderate level of capacity utilization, analyses the effects on real GDP, inflation (CPI), and unemployment level of the following events. Draw sketch graphs to support your findings
2. A fall in business confidence

Real GDP- leads to decrease in GDP

Inflation (CPI). – No effect on inflation

Unemployment level – increases

1. A large increase in households starting to save for their retirement.

Effect on:

Real GDP- leads to increase in GDP

Inflation (CPI). – No effect on inflation

Unemployment level – decreases

1. A rise in business confidence

Effect on:

Real GDP- leads to increase in GDP

Inflation (CPI). – No effect on inflation

Unemployment level – decreases

1. i) Draw an AD/AS model to show the economy close to full employment, i.e., actual national income falls short of the economy’s potential national income. Label the recessionary or inflationary gap.

Explain the effects of an increase in transfer payments on inflation and economic growth. Refer to your graph (3 marks)

The increase in transfer payment has no effect on inflation but has an effect on the economic growth the price of goods and services increases while the quantity demanded also increases.

SECTION C.

Q1.  Although economic growth is beneficial to a country, faster growth can be harmful. There is call from the Labor party to restrict foreign buyers from buying NZ property. At the same time the leader of NZ First party is calling on the government to reduce net migration to NZ. Discuss one advantage and two disadvantages in New Zealand due to faster economic growth of the property market and how does it affect to government’s macroeconomic objectives?      

Advantages

1. Importation can lead to product specialization, in that country will focus its energy in goods and services that they are good at producing.
2. Importation means that it is cheaper to purchase from outside than produce locally.
3. Importation means that the resident of importing country will gain access to goods and services that the country does not produce.

Disadvantage

1. There is price conflicts for similar products available locally.
2. There is a higher tendency of crippling the domestic industry.
3. Imports can lead to flooding of goods and services in a country.

Q2. Monetary Policy

What the intention of monetary policy is and what role does the OCR play in NZ?

-There is more money in circulation than the require hence banks lower the interest rate to attract the borrowers, who will invest and inject more money in economic activities hence increasing the output and hence the GDP will rise too (Kaplan, Moll, & Violante, 2018).

Calculating inflation using the CPI

What type of monetary policy is being conducted above?

-Expansionary policy

What might the potential impact of this policy be in the NZ economy?

1. Its purpose is to increase aggregate demand and economic growth in the economy.
2. It includes cutting rates and increasing money supply to boost the economy.

What is an intention of a fiscal policy?

-This aims at household getting more disposable income to use or spend.

What type of fiscal policy is mentioned above?

-Expansionary fiscal policy 

Discuss the potential impact of this policy in the NZ economy.

-It involves the tax cuts and rise in government spending. These policies lead to rise in aggregate demand while causing discrepancies in budget excesses (Addison, Niño?Zarazúa, & Pirttilä, 2018).

SECTION D.

Q1. International trade

1. Look at the table below which country has comparative advantage of production of wools? Why? (2 marks)

-Australia has a comparative advantage of producing wool than New Zealand because it does not produce fish as compared to New Zealand hence it can specialize in wool than New Zealand (McGovern, 2018).

1. Look at the table below which country has comparative advantage in the production of fish why

New Zealand has a comparative advantage of producing Fish than Australia because it can specialize in Fish than Australia.

OUTPUT PER WORKER PER ANNUM
	WOOL	FISH
NZ	60	90
AUSTRALIA	50	30

Briefly explain if it is a good idea or not for NZ and Australia to trade fish and wool? (3 marks)

-New Zealand should specialize in Fish while Australia should only specialize in wool it will be cheaper in Australia to import fish than to produce locally and it will be cheaper for the New Zealand to import wool than to produce locally.

1. Read the case study below and also use your knowledge to discuss one possible disadvantage of this trade to NZ consumers and to the Chinese producers (3 marks)

• China has a huge population as compared to New Zealand hence New Zealand consumers will have a deficit of chilled meat.

1. Use the following terms to indicate under which category the transactions below would be included in the Balance of Payments(Sharma, Rai, Rathee, & Mehendale, 2018).

Transactions	Category
(i)	Foreign tourist using domestic airline.	Investment income payment
(ii)	Premium paid to an overseas insurance company.	Balance of current transfers
(iii)	Interest paid by domestic companies for foreign bank loans.	Import of service
(iv)	Aluminum hub caps sold in Detroit by a New Zealand firm.	Export of good
(v)	Foreign aid to a tsunami ravaged Pacific neighbor.
(vi)	Dividends received by domestic shareholders from overseas.	Export of service
(vii)	A New Zealand firm buys cars from Japan.	Import of good
(viii)	A New Zealand flies on a plane operated by Singapore Airlines.	Import of service
(ix)	An Australian firm uses a New Zealand firm to ship its produce to an Asian destination.	Investment income receipt

Explain the likely effect of hosting the 2021 America’s cup (yachting) on New Zealand’s current account. (3 marks)

-Increase the GDP.

1. Complete the table below for the New Zealand dollar in the situations indicated.

Situation	Demand for $NZ or supply of $NZ?	Direction of shift	Appreciation or depreciation of $NZ?
(i)	New Zealand tourist traveling overseas	Demand for NZ$	LEFT	Depreciation
(ii)	New Zealand importers paying for raw materials	Supply of NZ$	RIGHT	Appreciation
(iii)	New Zealand firm setting up in Fiji	Supply of NZ$	RIGHT	Appreciation
(iv)	The Fijian government buying New Zealand goods and services	Supply of NZ$	RIGHT	Appreciation
(v)	Loss of overseas markets markets for New Zealand	Demand for NZ$	LEFT	Depreciation

NZ dollar has been falling compared to the US in the last 1-2 years but increasing compared to the AUD, explain the effect of a falling dollar on exporters and importers for both countries.

The New Zealand has been importing more goods and services from US than what it has been exporting to US. That’s the reason as to why the NZ$ has been falling as compared to US$. On the other hand, the NZ has been exporting more goods and services to Australia as compared to what the Australia has been importing to NZ

1. Explain the impact of a strong NZ dollar for our international education industry (3 marks)

International education offers New Zealand with a huge and talented, skilled and well-informed group of individual. While doing their studies the students get the opportunity of touring various places and hence contribute to GDP.

1. Analyze how expansionary monetary policy and contractionary monetary policy will affect the exchange rate of the New Zealand currency (6 marks)

The effects of expansionary monetary policy lower the exchange rate, decline the financial account and make stronger the current account. The rise in imports cause the current account to depreciate. Contractionary monetary policy slows down the extensive inflation that go along with a prosperous economy. The government achieve this by slowing its own spending.

Q3) For each of the situations describe in (a) through (c), construct a demand and supply graph representing the foreign exchange market for the New Zealand dollar (NZ$). Use the trade-weigh index (TWI) to represent price. Analyze the situations by showing any changes in demand and supply of NZ$ and the impact (appreciation or depreciation) on the overall value of the NZ$ (2 marks each)

1. An economic recession in the USA impacts adversely on both the price and volume of New Zealand’s exports to the USA and other markets.

The prices decreases due to economic recession and the volume of goods exported also decrease as shown in the diagram below.

Interest rates increases and hence leads to demand for New Zealand dollar, this in turns lead to rightward pressure on the exchange rate.                                                

1. There is an expansion of industries in New Zealand which compete successfully against imported substitutes and also succeed in export markets

References

Addison, T., Niño?Zarazúa, M., & Pirttilä, J. (2018). Fiscal policy, state building and economic development. Journal of International Development, 161-172.

Bernanke, B. S., Laubach, T., Mishkin, F. S., & Posen, A. S. (2018). Inflation targeting: lessons from the international experience. Princeton University Press.

Chang, S., Gupta, R., & Miller, S. M. (2018). Causality between per capita real gdp and income inequality in the US: Evidence from a wavelet analysis. Social Indicators Research, 269-289.

Kaplan, G., Moll, B., & Violante, G. L. (2018). Monetary policy according to HANK. American Economic Review, 697-743.

McGovern, E. (2018). International trade regulation (Vol. 2). Globefield Press.

Romanowska, A. B., & Smith, J. D. (2018). Diagrammatic duality. In Don Pigozzi on Abstract Algebraic Logic, Universal Algebra, and Computer Science. Springer, Cham.

Rossanty, Y., Hasibuan, D., Napitupulu, J., Nasution, M. D., & Rahim, R. (2018). Composite performance index as decision support method for multi case problem. International Journal of Engineering & Technology, 33-36.

Sharma, J., Rai, A., Rathee, N., & Mehendale, S. (2018). Study on Factors that affect the Indian Balance of Payments-A Methodological Overview and Thematic Review. . Asian Journal of Management, 847-852.