Q1. Browse the Australian Bureau of Statistics webpage (www.abs.gov.au). Download and plot the seasonally adjusted nominal GDP (in levels) and real GDP (in levels) for the period 1990-2016 (in quarterly frequency) from ‘Table 1. Key National Account Aggregates’. Now using the same Table 1, download and plot the percentage changes of these two GDP series (use trends) for the same time period. From the plots, could you find any relationship between nominal and real GDP in levels and growth rates? Explain your answer.

 

If we start analyzing the first two graphs that plot the seasonally adjusted values of Nominal GDP and real GDP, we can clearly see that the GDP growth in both real and nominal terms has been following a constant growth. There exists a clear one-to-one relationship between the two series as both of them have upward secular trend. However, the important thing to note here is that the nominal GDP has a steep growth i.e. has a higher growth rate than the real GDP values.

In order to analyze the relationship with more detail, let’s have a closer look to the trends of these two series i.e. percentage changes. Plotting the values in the same graph reveal that real GDP growth rates have higher volatility for the economy of Australia. However, in most of the cases, both the growth rates have movements in similar direction and a high correlation can be seen. The only exception in the plot is the time period of financial crisis where nominal growth rates can be seen as the predictor of real growth rates before the financial crisis, however after the crisis, the situation seems reversed for a short period of time.

 

 

 

Part B: Short Answer Questions

Q4. The Government is contemplating a tax cut of $20 billion to boost the economy which is experiencing some recessionary pressure. Use the aggregate expenditure model to analyse what will happen to the equilibrium GDP. If the marginal propensity to save is 0.2, how much would it influence the equilibrium GDP? Explain your answer.

Recessionary pressures are the periods in a typical business cycle, where the economy is below its potential. This creates a gap between the demand and supply of many markets simultaneously causing surpluses and shortages in every market. In a typical recessionary period, it is advisable to boost the economy through fiscal and monetary measures. One such fiscal measure to boost the economy is tax cut. In the situation above, the government is thinking of providing a tax cut of $20 billion to bring the economy out of the recessionary pressures.

According to the aggregate expenditure model, the tax cut would increase the disposable income of the consumers in the economy. This would consequently increase the consumption expenditures of the consumers in the economy which would eventually lead to a higher gross domestic product in subsequent years. By this way, the recessionary pressures would be normalized and the economy would again be brought closer to its potential (NAIRU).

The effect of a tax cut on the GDP of the economy goes through a multiplier process which was first explained by Keynes. The Keynesian multiplier approach can be used to determine the influence of any particular measures on the final level of the economy. The simplest tax multiplier in a three sector closed economy model is   where b is the marginal propensity to consumer. With the information given above i.e. marginal propensity to save is 0.2, we can immediately identify marginal propensity to consume being equal to 0.8. Plugging the values into the multiplier formula reveals that the value of tax multiplier in the economy is -4. This implies that a $20 billion tax cut would increase the GDP of the economy by $80 billion through multiplier process.

 

Q5. Starting from an initial long-run equilibrium, use the dynamic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is a decline in investment expenditure. What policy action would the central bank take in such circumstance?

Starting from the initial long run level of equilibrium, the figure 3 below depicts the situation where all the markets were initially in an equilibrium state. The Aggregate Demand curve with intersecting the long-run and short-run aggregate supply curve at a single unique point, forming the equilibrium price levels and full employment level of real GDP.

Figure 3: Dynamic AD-AS model showing the initial equilibrium

Now suppose that due to some unknown reasons, there is a sharp decline in the investment expenditures of the economy. Due to this decline in the investment, the aggregate demand curve will shift downwards to the left. This is due to the fact that Investment expenditure is a component of aggregate expenditure and aggregate demand is equivalent to aggregate expenditures due to the equivalence of different GDP calculation approaches. The effect of a decline in investment is depicted in the figure 4 below:

Figure 4: Dynamic AD-AS model showing the effect of investment decline

As we can see in the figure 4 that a decline in investment shifted the aggregate demand curve from AD(0) to AD(1), causing a temporary surplus due to the concept of wage-price stickiness. If the markets were frictionless, the new aggregate price levels would be P*, however, the stickiness will not let the markets clear at the lower prices. The surplus would curve the market to react accordingly and the SRAS will be shifted back to SRAS(1).

Similarly the Long-Run aggregate supply curve will also shift backwards to bring the market into its long-run equilibrium state after the decline in investment, however the output will not be lower at the same general price levels in the economy.

 

 

Part C

A brief introduction on the organisation you have chosen, and the industry or sector they operate in

The Organization that I have chosen as my employer is NERA Economic consulting. It is a consultancy firm that provides its consultancy services in economics, finance and quantitative principles to its clients. The aim of this organization is to provide efficient solution to all its clients by integrating the theoretical principles will the real life data set. NERA is the best example of amalgamation of theoretical foundations with the practical approaches to design effective and efficient solution for complex situations. The economists at NERA are renowned not only for providing consultancy services to private sector but also to provide policy solutions to the governments.

A summary of the role you have chosen, including the skills required for the role. Use the Economics Learning Standards for Australian Higher Education to aid your reflection. Break down where you meet these expectations, and your areas for improvement. How would you show a recruiter that you have the required skills and experiences for your chosen economics position?

The role that I have chosen for myself in NERA economic consultancy is “Research Officer / Economic Analyst, Competition Economics”. The job description of the role states that the incumbent would be responsible for carrying out analysis and providing technical expert opinion in the areas of Competition and Antitrust, mergers and acquisitions of telecommunication and energy companies, financial litigation as well as environmental regulations.

The role demands an in-depth knowledge of financial data analysis as well as experience of quantitative model building in order to assess whether the firms under consideration can be justified for or against the charges of being involved in anti-competitive activities. Heavy use of econometric models and proficiency in computer programming and statistical packages are the dire requirements for this post.

In terms of meeting these expectations, I can justify myself being an industrial economist having done the required coursework. My aptitude and flair towards competition economics and my grasp over the tools of microeconomic analysis coupled with the skills of data analysis and model building would help to fit the role swiftly. Although, I may not be able to produce astonishing results right after joining the company, however, after sufficient training and acquaintance with the true nature of this role, I would certainly be able to produce above expectation results.

In my opinion, I need to brush up a little-bit my knowledge of time-series econometrics and financial modeling to get down with the modeling component of this job easily. Moreover, I would also need to a have a quick review of business law and financial reporting standards to tackle the financial litigation matters easily. However, my experience of handling large data sets and analyzing them on everyday basis would certainly be a big advantage when working in this role.

Describe what drew you to your selected position. Link the chosen position to your VIPS (values, interests, personality and skills) and how the chosen position is relevant to your long-term career plan

My passion for working with different types of data sets and microeconomic analysis of the problems drew me to this position. I have deep interests for analyzing the anti-competitive behavior of firms i.e. collusion to drive out competitive efficiency from