Chapter 1 and 2 Tutorial MEMO
Question 1:
The figures exhibit that from 2007 the signs of the economic recession over the
world had started to appear. This was led by the housing price that started to decline
and in a very short period yielded negative consequences worldwide.
Using your own words, discuss the following:
1. 2008 financial crisis.
Once house prices began declining, many people had taken large home loans
and were unable to make home loan payments. When the house prices
declined the value of the loan often exceeded the actual value of the homes,
this gave the borrowers incentive to default on their payments. The banks that
issued home loans packaged these loans into securities and sold them to
them to other banks and other banks repeated this action which made it
difficult to assess the value of the loans. Banks no longer trusted the quality of
assets on other banks’ balance sheets. This resulted in banks no longer
lending to each other and this led to banks becoming bankrupt.
2. The channels through which other countries around the world were badly
affected
Other countries were affected through two channels, namely; the trade
channel and financial channel. Consumers and firms in the USA cut back on
spending. The decrease in spending led to a decrease in imports and exports
and the US output decreased and led to a decrease in the output of other
countries, this explains the trade channel. Banks in the USA needed funds in
the USA and cut back funds to other countries which created liquidity
problems for other banks in other countries.
3. Indicate what was the major channel through which South Africa was affected
and how
South Africa was mostly impacted through the trade channel, with the cutback
in exports and imports in the US. After the crisis, South Africa had a negative
output growth, which has become positive with a low output growth since
2010. The lack of output growth spilled over into a high unemployment rate
after the crisis
Question 2:
Suppose there is an economist that is hardly interested in analyzing the state of
health of the country. Indicate, discuss the major variables that he/she must look at.
How are they related?
Economists look at output growth, the unemployment rate and the inflation rate when
looking at the state of health of the country. When there is a high output growth,
firms will expand which comes with a demand for labour and the firms employ more
people which decreases the unemployment rate. When more people have jobs,
people are earning salaries which increases their purchasing power, resulting in an
increase in spending in the economy, leading to a higher demand of goods and
services which leads to prices increasing. A sustained increase in price is called
inflation.
Question 3:
An economy produces three goods: Computers, televisions (TVs) ,and apples.
Quantities and prices per unit for years 2013 and 2014 are as follows
Goods 2013 2014
Quantity Price Revenue Quantity Price Revenue N.P
Computer 16 R8000 R128 000 20 R10000 R200 000 2013 2014
TVs 8 R4000 R32 000 10 R6000 R60 000 R1.12 R1.18
Apples 1000 R2 R2 000 1200 R3 R3 600
RY 1 024 TR = R162 000 1230 TR= R263 600
Use the table above to answer the following questions
3.1 What is nominal GDP in 2013 and 2014 and by what percentage does
nominal GDP change from 2013 to 2014?
Nominal GDP2013 = R128 000 + R32 000 + R2 000
= R162 000
Nominal GDP2014 = R200 000+ R60 000 + R3 600
= R263 600
(263 600 – 162 000)/162 000 * 100 = 62.72%
There is an 62.72% increase in nominal GDP in 2014 from 2013.
2nd Method
(New/ Old) – 1 *100
(263 600/162 000) -1 * 100 = 62.72%
NB remember to say the second method can be adjusted for time periods.
3.2 Using the prices for 2010 as the set of common prices, what is real GDP in 2013 and
2014 (use the following prices: CPI 2010= 100, CPI 2013= 112 and 2014= 118)
Real GDP2013 = 162 000* 100/112
= R144 642.86
Real GDP2014 = R263 600*100/118
= R223 389.83
3.3 Calculate the economic growth rate for 2014?
Economic growth = (R223 389.83 - R144 642.86)/ R144 642.86 * 100
= 54.44%
3.4 Given your answer in 1.3 what would you expect would happen to the inflation and
unemployment rate in 2014?
The expectation is that the unemployment rate would decrease due to the increase in
GDP (economic growth). A decrease in the unemployment would lead to an increase
in inflation.
Question 4
Answer the following questions below with the following information:
People of working age: 268 000
Population Employed: 183 600
Military Personnel: 16 000
Population without a job and are looking: 13 400
People are no longer looking for work: 10 000
4.1) Calculate the labour force
LF = 183 600+ 13 400 = 197 000
4.2) Calculate the unemployment rate
(13 400/197 000) x 100 = 6.8%
4.3) Calculate the labour participation rate.
LPR = (197 000/268 000) x 100 = 73.5%
Question 5
Discuss the ways in which one can measure GDP
GDP can be measured three ways. First, GDP represents the market value of the
final goods and services produced in the economy during a given period. This
would be obtained by adding C, I, G, and NX. Second, GDP is the sum of the
value added by firms. The value added for a firm equals the value of the
production (at that stage of the production process) minus the value of the
intermediate goods (excluding labor services). The final value of aggregate output
can be calculated by either summing the value of all final goods and services OR
by summing the value added of all goods and services at each stage of
production. And finally, GDP is also the sum of all incomes earned in a given
period.
Question 6
Some economists believe that the reason European states experience high levels of
unemployment is due to labour market rigidities. Explain the concept of labour market
rigidities and how labour market rigidities may worsen the unemployment rate.
Examples of labor market rigidities are: relatively high minimum wage, relatively
high unemployment benefits, and relatively high level of worker protection. All
three of these are hypothesized to cause a reduction in employment and,
therefore, an increase in the unemployment rate.