Bachelor of Business (Hons) Finance and Economics

Dr Malarvilly Ramayah/ DR MUHAMMAD HASEEB

Wong Hao Yi
12/11/2020
Muhammad Juneid Imrit 12/11/2020

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 (i) INTRODUCTION.
As the coronavirus spread all across the world in early January 2020, Brazil registered its first
cases on the 25th of February. Macroeconomic is the study that is carried out by economists to
see how the variation in economic activities and prices affects the country. The function of the
overall economy is being explained by using an economic theory. The consequences of a
pandemic can be model by using economic models. Economic theory is simply reasoning
structures to be used to justify a specific economic phenomenon. This assignment is about how
the new events affect the economic growth of Brazil. Due to the recent covid-19 spread the
normal way of living has been changing drastically with lockdown, restrictions on travel and
panic factors expressed by people such as panic buying. (Atkeson, 2020). Brazil being a
developing country is struggling to be able to control the effect that covid-19 has bring upon its
economy. The variables that are going to have more emphasis on in this study are
unemployment, inflation and exchange rate. The study is analyzing how the economic growth of
Brazil, that is the Gross Domestic Product (GDP) which can be considered as the dependent
variables is affected by changes in independent variables such as unemployment rate, inflation
and exchange rate. The data are being deprived from the World bank data to observe the trend in
all the independent variables. The economy in brazil has been struggling, following the trend the
GDP was noticed to drop in 2014-2016 and for the same years the unemployment rate was
higher as well as the exchange rate. The figures of GDP seem to be stabilizing in the recent years
(2017-2019) this time seems to be a decrease in inflation to be the cause. If this trend follows and
the unemployment rate keeps increasing the country is to be facing a recession and with the
covid-19 pandemic, the effect on the economy is very serious. Covid-19 is causing lots of
companies to either shut down or the employees to be working from home hence their income is
lesser, and those companies are left with no choice that to decrease the number of workers. The
price of goods is increasing exponentially due to higher demands making it very challenging for
Brazil to survive this outbreak of coronavirus. Not to forget that in 2014 Brazil was the fifth most
populated country in the world with 200 million citizens. The economic situation in Brazil is
very serious and many citizens protested on the streets.

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 (ii) LITERATURE REVIEW
Dependent variable: GDP
Independent variable: unemployment, exchange rate and inflation.
GDP.
A global pandemic will cause the gross domestic product of the whole world to decrease by 2%
and for developing countries such as Brazil a figure of 2.5% decrease is expected. (Maliszewska,
2020). To be able to undertand the cause of such a drastic number, the relationship between the
dependent and independent varies has to be verified. Since the virus is fast spreading we cannot
conclude on the GDP of Brazil but it wont be getting any better.

Unemployment.
Unemployment has been the challenge of every government in every country around the world.
Each country has a percentage of its citizens who have the knowledge or qualification and who
are willingly searching for jobs to be able to have a constant income but there are no jobs
available for them. Unemployment rate is calculated as follows:
number of unemployed
umemplpyment rate= ,
labour force
Where labor force is the total number of employed and unemployed citizens.
The types of unemployment are structural, seasonal, cyclical and frictional.
Studies shows that when unemployment rate decreases, the GDP of the country increase.
Unemployment is more popular in developing countries.

Exchange rate
Exchange rate is described as the difference in the rates (money value) of once specific country
compared to other countries. Exchange rate can be fixed for some period of time but fluctuates a
lot when there is an event affecting the economy around the world such as the outbreak of the
covid-10 virus. A high exchange rate will result in increase in economic growth.[ CITATION
DAN08 \l 1033 ]
Studies are still being carried out to determine the relationship between GDP and exchange rate
but it seems that the statement above about high exchange rate meaning increase in economic
growth are trending in developing countries such as Brazil but is not likely to be the case with
developed countries. [ CITATION DAN08 \l 1033 ]
Other studies predict that because of a drop in net exports cause by increase in exchange rates
which causes the GDP to decrease.[ CITATION Mau16 \l 1033 ]
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Inflation.

Inflation is the result of an increase in price of goods and services for a certain amount of period
simultaneously causing a sustainable drop in the purchasing power of money. As experienced in
all the countries around the world, there was an increase in the price of many products because of
higher demands caused by panic buying. Some retailers were selling tissue rolls 5 times the usual
price because it was very limiting in the market.
[ CITATION Muh13 \l 1033 ]inflation does not have any effect on economic growth in the short
run.
Whereas there is a positive relationship between the gross domestic product growth rate and the
inflation. [ CITATION Gir01 \l 1033 ].
It really depends on the set of data that are being done to carry out research on the effect on
inflation on the economic growth of a country.

iii. Analysis 
Solow Growth Model 
The Solow growth model describes an economy with a single return to scale in the production
function under the hypothesis of perfect competition. The growth of labor and capital inputs
increases output. In the 1950s, Robert Solow proposed the Solow growth model and used the
Solow growth model to explain the impact of savings rate and population growth on capital
accumulation, which in turn affected economic growth. The model needs to meet the following
conditions, such as: labor must always be in full employment; labor and capital are paid
according to the marginal physical productivity and they can be substituted for each other; prices
and wages are adjustable, but returns to scale are not adjustable; improvement of technology;
only produce a product that can be used for consumption and investment; output is a net output
after capital depreciation (Mixon and Sockwell, 2007). 
Romer Growth Model 
Romer growth model extensively examines the effect of technological innovations on economic
development. Romer reiterated that the commitment of design and technology to productivity
expansion has a realistic significance that is compatible with the realities. In Romer growth
model, in addition to the above-mentioned productive resources, capital and labor, there are two
attributes: intellectual resource and operational level. The labor used throughout the formula
corresponds to low skilled workers, thus human resources contribute to skilled labor.
Social labor is represented in terms including its duration of education, along with formal
education and on-the-job preparation. In this way information or schooling can be used for
industrial prosperity. The responsibility is taken into account. Considering the aspect of the
technical level shown in the model, Luo reverted that something is expressed in material goods,
including certain new machinery, innovative commodities, etc. They reflect the effects of
technical progress. In several other terms, the advancement of expertise is represented in two

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perspectives: upon on another side, it is the competence of the workforce, which will be
demonstrated in the system through intellectual capital; in the other hand, it is the development
that is expressed in commodity goods such as innovative appliances and revolutionary raw
materials. Advancement, it becomes represented in the system through the degree of technology
(Zhao, 2019). 

We will graphically show the model of Solow growth due to COVID-19. As shown in Figure 1,
investment will be higher than depreciation assuming that the capital per worker is K0. This
therefore causes the equilibrium point to shift right from the original K0 to K1, and subsequently
the country's total output, Y0, will also move from a boost to Y1, thus reaching a steady state.

Figure 1

At ceteris paribus, a new disease called COVID-19 has begun to spread rapidly so far in late
2019. And Brazil has very quickly become one of the countries most affected by COVID-19.
The President of the country has often reassured civilians with statements such as "it's just a little
flu" and "the elderly are more at risk", but as a result, the country's Ministry of Health
organization is now on the verge of collapse. According to news reports, Brazil has more than
1,500,000 cases of COVID-19 and more than 60,000 deaths from the disease. This has had a
serious impact on Brazil's economy and growth, and we expect COVID-19 to increase the
unemployment rate and decrease the country's economic growth (Ponce, 2020). We will show in
the figure below how COVID-19 using the Solow growth model will affect Brazil's economic
growth.

As Brazil's population growth decreases due to the number of deaths in the country, this will lead
to a recession in Brazil and also a decrease in population density. Therefore, as shown in Figure

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1, Capital-Labor-Ratio will move from K1 at the beginning to the right to K2. this will change
the steady state of the output that follows.

Figure 2

As shown in Figure 3, due to the fall in capital, and this will indirectly affect the steady state of
the country's output, Capital-Labor-Ratio will shift right from K1 to K2 to reach a new
equilibrium and form a new steady state of output. As the Capital-Labor-Ratio rises, Output per
Worker, depreciation and Investment also rises with it from Y1 to Y2, thus taking on a new
curve.

Figure 3

 
In order to make the data more accurate, we will also use Brazil's GDP, Exchange rate,
unemployment and inflation rate from the world bank data for data purposes.

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Table 1

 
Table 2

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iv. Policies
Based on all the data above, we can see how much impact COVID-19 has on macroeconomic
indicators in Brazil. We believe that it is advisable for Brazil to use monetary policy and fiscal
Policy as the main policies for Brazil to raise its GDP.
Monetary Policy
Monetary policy refers to the measures taken by a country to indirectly affect other economic
activities of the country by controlling the money supply. Its policy mainly to adjust the bank
interest rate or commercial bank margin and open market operations to implement. Much of this
policy will be carried out by central Banks (Amadeo, 2020).
In order to achieve the objectives of monetary policy, the central bank is "people-oriented". The
bank can use either contractionary or in other cases a monetary policy called expansionary. In
case of inflation, contractionary money policy is being used by only the central bank of the
country. This policy is being used in order to decrease the money supply and elevate the rate of
interest (Hussain, 2020). In a period of recession, another study shows that expansionary
monetary policy is used by the central bank to increase the money supply and simultaneously
lower interest rates (Pettinger, 2020). The interest rate used for monetary policy is set by Central
Bank of Brazil.
There are a total four factors that defines total expenditure, namely investment, consumption,
government expenditure and net exports. When there is an increase in the amount investing, total
expenditure will eventually increase, which will subsequently cause total demand to increase.
Considering Figure 4, there will be a shift from 𝐴𝐷1 to 𝐴𝐷2 to the right of the aggregate

(billions of USD)

Figure 4

demand. At 1 pound, there is a deficit because total demand is more than total supply, which
raises the cost from 1 pound to 2 pounds. Companies will be encouraged by a higher price level
to increase production hence increasing profits, because wages are considered to remain constant
in the short term, so the problem of shortage is resolved, which indicates an increase in total
supply in the short term. This will cause it to move along the curve of 𝑆𝑅𝐴𝑆. When the price
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level rises, the total demand will decrease due to the substitution effect and the wealth effect.
Through the international substitution effect, when the price of Brazilian goods rises, foreign
goods are cheaper than Brazilian goods, so total demand decreases. Through the interest rate
substitution effect, this means that the interest rate rises when the price rises due to the fall in the
real value of the currency, which will reduce the total demand. The higher the price, the lower
the actual wealth, and people will reduce consumption, resulting in a decrease in total demand.
The decrease in total demand leads to a shift along the 𝐴𝐷2 curve, and the new product market
equilibrium is achieved at point b. In summary, as shown in Figure 4, the increase in real GDP
from 𝑌1 to 𝑌2 indicates that economic performance has improved.

Fiscal Policy
Fiscal policy refers to the tasks of economic, political and social development of a country in a
certain period of time and the formulation of fiscal work and principles, and the use of fiscal
expenditure and tax policy to regulate aggregate demand. Fiscal policy is the main component of
a country's overall economic policy, which is also inextricably linked to other economic policies
(Amadeo, 2020).
Expansionary fiscal policy is also called expansionary fiscal policy. Expansive fiscal policy is
also a policy behavior that the state uses fiscal distribution activities to influence and increase the
total social demand. Its main method of implementation is to increase the fiscal distribution of
fiscal deficits through tax cuts and increased expenditures (Pettinger, 2020). On the contrary, the
contractionary fiscal policy refers to the fiscal distribution method that reduces the GDP deficit
or raises the surplus through tax increase and expenditure reduction, which can also indirectly
reduce the total demand of the society (MasterClass, 2020).
According to the text, due to the existence of the Covid-19 pandemic, Brazil's economic
performance is facing a slowdown, which undermines Brazil's total demand and supply. The
government should adopt an expansionary fiscal policy to help get rid of the recession gap
caused by it and stimulate economic development by maintaining sustainable tax cut efficiency.
Brazil’s aggregate demand and supply are impaired, leading to a decline in consumers’ spending
power. Although demand is reduced, customers require fewer goods. Conversely, the aggregate
supply curve is also affected, which also leads to a decline. Due to the adverse impact on the
company’s arrangements, the company is forced to experience financial difficulties, resulting in

Price level (%)

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(billions of USD)
a decrease in the number of workers and inefficient production processes. The probability of
causing economic recession Y0<Yf indicates that it is lower than full employment, leading to an
increase in unemployment. Expansionary fiscal policy will help increase the consumption of
households and businesses, because they will get more income, enhance their purchasing power
to improve demand, market demand continues to grow, the aggregate demand curve shifts to the
right from AD0 to AD1, with new The number of demand points b. The increase in overall
demand from AD0 to AD1 also indicates that supply has also increased, which dominates the
rise in prices from P0 to P1. This also means that an imbalance has occurred due to market
shortages (QAD > QAS). It shown as Figure 5.

v. Conclusion
To be able to surpass the repeating pattern of a slowdown in the economy, the economic
performance needs to be improved and it can be done by lowering some of the interest rates. But
the government cannot let interest rates to fall too down. Too low interest rate will create doubt
in the mind of people hence preventing them from investing or keeping their money into the
bank according to research, thereby exacerbating the gap in inflation and the low returns for
banks and lenders. The independent variables are still fluctuating because of increasing and
decreasing in the rate of covid-19 cases. People are very unsure of whether to invest or not
because the economy is not very stable at the moment. But there is some hope now with USA
providing a 90% vaccine and Russia recently came close to 92% effectiveness. It will be years
and a lot of macroeconomic research and analysis before the economy of any country including
Brazil could stabilize.

(v) References List

1. Amadeo, K., 2020. How Congress Manipulates The Economy. [online] The Balance.
Available at: <[Link]
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3. Atkeson, A., 2020. WHAT WILL BE THE ECONOMIC IMPACT OF COVID-19 IN
THE US. NBER WORKING PAPER SERIES.
4. Amadeo, K., 2020. 6 Ways To Legally Create Money Out Of Thin Air. [online] The
Balance. Available at: <[Link]
types-and-tools-3305867> [Accessed 12 November 2020].
5. Habib, M. M., 2016. The real exchange rate and. Working Pape

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6. Hussain, A., 2020. Why The Federal Reserve Uses Contractionary Monetary Policy To
Curb The Inflation That Accompanies An Overheating Economy. [online] Business
Insider. Available at: <[Link]
monetary-policy> [Accessed 12 November 2020].
7. Mallik, G., 2001. INFLATION AND ECONOMIC GROWTH: EVIDENCE. Asia-
Pacific Development Journal, 8(1), pp. 123-135.
8. Maliszewska, M., 2020. The Potential Impact of COVID-19. Policy Research Working
Paper .
9. MasterClass, 2020. [online] Available at: <[Link]
policy-guide> [Accessed 12 November 2020].
10. Mixon, J. and Sockwell, W., 2007. The Solow Growth Model. The Journal of Economic
Education, 38(4), pp.483-483.
11. Pettinger, T., 2020. Expansionary Monetary Policy - Economics Help. [online]
Economics Help. Available at: <[Link]
policy/expansionary-monetary-policy/> [Accessed 12 November 2020].
12. Pettinger, T., 2020. Impact Of Expansionary Fiscal Policy - Economics Help. [online]
Economics Help. Available at:
<[Link]
policy/> [Accessed 12 November 2020].
13. Ponce, D., 2020. The impact of coronavirus in Brazil: politics and the pandemic. Nature
Reviews Nephrology, 16(9), pp.483-483.
14. RODRIK, D., 2008. The Real Exchange Rate. Harvard University
15. Zhao, R., 2019. Technology and economic growth: From Robert Solow to Paul
Romer. Human Behavior and Emerging Technologies, 1(1), pp.62-65.

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