CBEB1108-Managerial CBEB1108-Managerial EconomcsEconomcs

TITLE : ECONOMY GROWTH, THE TITLE : ECONOMY GROWTH, THE FINANCIAL SYSTEM & BUSINESS FINANCIAL SYSTEM & BUSINESS

CYCLECYCLE

Presented by :Presented by :

MALEK BIN ABU BAKAR CEC080012MALEK BIN ABU BAKAR CEC080012

MOHD TAHIR BIN WASLI CEC080020MOHD TAHIR BIN WASLI CEC080020

NUR ATIQAH BT ABDULLAH PAIN CEC080030NUR ATIQAH BT ABDULLAH PAIN CEC080030

NURUL ERNA DEWI BT MOHD SAID CEC080028NURUL ERNA DEWI BT MOHD SAID CEC080028

SUMITHRA DEVI A/P MOGAN CEC080038SUMITHRA DEVI A/P MOGAN CEC080038

QUESTION 1.6 – A question from Chapter 7 asked about the real GDP QUESTION 1.6 – A question from Chapter 7 asked about the real GDP and the standard of living in a country. Based on what you read about and the standard of living in a country. Based on what you read about

economic growth in this chapter, elaborate on the importance of growth economic growth in this chapter, elaborate on the importance of growth in GDP, particularly real GDP per capita, to the quality of life of a in GDP, particularly real GDP per capita, to the quality of life of a

country’s citizens.country’s citizens.

1.1. A higher the GDP per capita, the higher the purchasing power is for the A higher the GDP per capita, the higher the purchasing power is for the citizens.citizens.

2.2. A higher per capita earnings normally means higher standards of living.A higher per capita earnings normally means higher standards of living.

3.3. A higher income nation also contributes to improvement in technology and A higher income nation also contributes to improvement in technology and improvements in human physiology.improvements in human physiology.

4.4. A higher per capita normally means more spending in healthcare thus A higher per capita normally means more spending in healthcare thus resulting in longer life expectancy—higher purchasing power in medication resulting in longer life expectancy—higher purchasing power in medication and treatment.and treatment.

5.5. Economic growth in the US and western Europe has led to improvements in Economic growth in the US and western Europe has led to improvements in agriculture technology and rising income led to dramatic improvements in the agriculture technology and rising income led to dramatic improvements in the nutrition of the average person.nutrition of the average person.

6.6. In the US and western Europe, economic growth resulting in technical In the US and western Europe, economic growth resulting in technical progress in the purification of water leading to sharp declines in sickness due progress in the purification of water leading to sharp declines in sickness due to waterborne diseases.to waterborne diseases.

Standard of living Standard of living Standard of living generally refers to the Standard of living generally refers to the level of wealth, comfort, material goods and necessities.level of wealth, comfort, material goods and necessities.

Real GDPReal GDPPer capitaPer capita

2005 (dollars)2005 (dollars)

45,00045,000

35,00035,000

25,00025,000

15,00015,000

10,00010,000

5,0005,000

0 1920 1940 1960 1980 20000 1920 1940 1960 1980 2000

• In year 1900 – people enjoying the highest of standard of living in the world.In year 1900 – people enjoying the highest of standard of living in the world.• In that year 1900 the people suffering with diseases such as smallpox, cholera and etc. In that year 1900 the people suffering with diseases such as smallpox, cholera and etc.

The foods and medicine is not enough to cover for them.The foods and medicine is not enough to cover for them.• The increases in real GDP per capita depend on increases in labor productivity.The increases in real GDP per capita depend on increases in labor productivity.

Quality of Life is more subjective and intangible. The United Nations Universal Declaration of Human Rights adopted in 1948, provides an excellent list of factors that can be considered developed in evaluating quality of life.

QUESTION 1.13 – (Related to the making the connection on QUESTION 1.13 – (Related to the making the connection on page 277) If the keys to Botswana’s rapid economic growth page 277) If the keys to Botswana’s rapid economic growth

seem obvious, why have other countries in the region had so seem obvious, why have other countries in the region had so much difficulty following them?much difficulty following them?

There are a several factors had contribute to Botswana’s rapid economic growth compare to other countries in the African region.

i.Botswana had avoided the civil wars that plagued other African countries.

ii.Good earning from diamond exports. (Jwaneng, in Botswana, is the world's largest and richest diamond mine)

iii.The government policies - protecting private property, avoiding political instability and corruption and allowing press freedom and democracy.

QUESTION 2.6 – An International Monetary Fund Factsheet makes the QUESTION 2.6 – An International Monetary Fund Factsheet makes the following observation regarding stable financial: “A sound financial following observation regarding stable financial: “A sound financial

system is ……. essential for supporting economic growth.” Do you agree system is ……. essential for supporting economic growth.” Do you agree with this observation? Briefly explain.with this observation? Briefly explain.

i.i. Resilient, well-regulated financial systems are essential for economic and financial Resilient, well-regulated financial systems are essential for economic and financial stability in a world of increased capital flows.stability in a world of increased capital flows.

ii.ii. A problems in financial systems can reduce the effectiveness of monetary policy, deepen A problems in financial systems can reduce the effectiveness of monetary policy, deepen or prolong economic downturns, and, in case of large scale problems, trigger capital flight or prolong economic downturns, and, in case of large scale problems, trigger capital flight or create large fiscal costs related to rescuing troubled financial institutions. or create large fiscal costs related to rescuing troubled financial institutions.

iii.iii. Ample international financial and trade links imply that financial weaknesses in one Ample international financial and trade links imply that financial weaknesses in one country can rapidly spill over across national borders. country can rapidly spill over across national borders.

iv.iv. Hence the soundness of a country's financial system is important both for the domestic Hence the soundness of a country's financial system is important both for the domestic economy, as well as for its trading partners and countries with which it has financial economy, as well as for its trading partners and countries with which it has financial linkages.linkages.

QUESTION 2.9 – Consider the following QUESTION 2.9 – Consider the following data for a closed economy :data for a closed economy :

• Y = $ 12 trillionY = $ 12 trillion

C= $ 8 trillionC= $ 8 trillion

G=$ 2 trillionG=$ 2 trillion

Spublic= -$ 0.5 trillionSpublic= -$ 0.5 trillion

T=$ 2 trillionT=$ 2 trillion

aa) Private saving) Private saving

Spublic= T-G-TRSpublic= T-G-TR

$ 0.5 trillion = 2-2-TR$ 0.5 trillion = 2-2-TR

TR = $ 0.5 trillionTR = $ 0.5 trillion

Therefore, Therefore,

Sprivate = Y+TR-CSprivate = Y+TR-C

= 12 + 0.5 – 8 – 2 = 12 + 0.5 – 8 – 2

= $ 2.5 trillion= $ 2.5 trillion

QUESTION 2.9 – Consider the following QUESTION 2.9 – Consider the following data for a closed economy :data for a closed economy :

bb) Investment spending) Investment spending

Investment = Y-C-GInvestment = Y-C-G

= 12 – 8 – 2= 12 – 8 – 2

= $ 2 trillion= $ 2 trillion

cc) Transfer payments = ) Transfer payments = $ 0.5 trillion$ 0.5 trillion

QUESTION 2.9 – Consider the following QUESTION 2.9 – Consider the following data for a closed economy : data for a closed economy : (cont.)(cont.)

dd) ) The government budget deficit or budget surplusThe government budget deficit or budget surplus

Deficit = T< G+TRDeficit = T< G+TR

Surplus = T> G+TRSurplus = T> G+TR

Tax = $2 trillionTax = $2 trillion

G+TR = $2+$0.5G+TR = $2+$0.5

Tax < G+TR Tax < G+TR

$ 2 trillion < $ 2.5 trillion$ 2 trillion < $ 2.5 trillion

In this case, the government spends more than it collects in taxes, In this case, the government spends more than it collects in taxes, therefore it runs in budget deficit.therefore it runs in budget deficit.

QUESTION 2.9 – Consider the following QUESTION 2.9 – Consider the following data for a closed economy : data for a closed economy : (cont.)(cont.)

QUESTION 2.10 – In problem 2.9, suppose that government QUESTION 2.10 – In problem 2.9, suppose that government purchases increases from $2 trillion to $2.5 trillion. If the values purchases increases from $2 trillion to $2.5 trillion. If the values for Y and C are unchanged, what must happen to the value of S for Y and C are unchanged, what must happen to the value of S

and I? Briefly explain.and I? Briefly explain.

Y = $ 12 trillionY = $ 12 trillion

C= $ 8 trillionC= $ 8 trillion

G=$ 2.5 trillionG=$ 2.5 trillion

Spublic= -$ 0.5 trillionSpublic= -$ 0.5 trillion

T=$ 2 trillionT=$ 2 trillion

Investment = Y-C-GInvestment = Y-C-G

=12-8-2.5=12-8-2.5

= $1.5 trillion= $1.5 trillion

Saving = Y-C-G

=12-8-2.5

= $1.5 trillion

Saving = Investment

Therefore the government runs with balanced budget.

QUESTION 2.12 – Use the graph to QUESTION 2.12 – Use the graph to answer the following questions.answer the following questions.

a)a) With the shift in the demand for loanable funds, With the shift in the demand for loanable funds, what happen to the equilibrium real interest rate and what happen to the equilibrium real interest rate and

the equilibrium quantity of loanable funds?the equilibrium quantity of loanable funds?

a.a. The graph show relationship between The graph show relationship between loanable fund as demand curve and interest rate as loanable fund as demand curve and interest rate as supply curve, which supply is shown as S1 and supply curve, which supply is shown as S1 and demand as D1. When the shift in the demand for demand as D1. When the shift in the demand for loanable to the right from D1 to D, the demand loanable to the right from D1 to D, the demand increase and the equilibrium of interest rate and increase and the equilibrium of interest rate and quantity demand will shift equilibrium from A to C.quantity demand will shift equilibrium from A to C.

b) b) How can the equilibrium quantity of loanable funds increase How can the equilibrium quantity of loanable funds increase when the real interest rate increases? Doesn’t the quantity of when the real interest rate increases? Doesn’t the quantity of

loanable funds demanded decrease when the interest rate loanable funds demanded decrease when the interest rate increases?increases?

Conversely, if the real interest rate were higher than Conversely, if the real interest rate were higher than the equilibrium level, the quantity of loanable fund the equilibrium level, the quantity of loanable fund would exceed the quantity of loanable funds would exceed the quantity of loanable funds demanded.demanded.

Because a higher interest rate makes borrowing more Because a higher interest rate makes borrowing more expensive, the quantity of loanable funds demanded expensive, the quantity of loanable funds demanded falls as the interest rate rises. In other words, the falls as the interest rate rises. In other words, the demanded curve for loanable funds slopes demanded curve for loanable funds slopes downward, and the supply for loanable funds slopes downward, and the supply for loanable funds slopes upward. upward.

C )C ) How much would the quantity of loanable funds How much would the quantity of loanable funds demanded have increased if the interest rate had demanded have increased if the interest rate had

remained at remained at i1.i1.

If the demand increase and shift to the right, the If the demand increase and shift to the right, the quantity of demand will shift from L1 to L3 where the quantity of demand will shift from L1 to L3 where the interest rate remained unchanged at I1 and the interest rate remained unchanged at I1 and the equilibrium will shift from A to B. equilibrium will shift from A to B.

How much does the quantity of loanable funds How much does the quantity of loanable funds supplied increase with the increase in the interest supplied increase with the increase in the interest

rate from rate from i1 to i2?i1 to i2?

With the increase of interest from I1 to I2, the quantity With the increase of interest from I1 to I2, the quantity of loanable will shift from L1 to L2.of loanable will shift from L1 to L2.

QUESTION 3.7 – Related QUESTION 3.7 – Related to page 288 to page 288

Risk taken by firm during recession to expanding the Risk taken by firm during recession to expanding the business.business.

1.1. Rising the interest rate.Rising the interest rate.

2.2. Rising of COST – e.g. increase of fixed cost and Rising of COST – e.g. increase of fixed cost and variable cost .variable cost .

3.3. Increase of debt – spending by firms on capital Increase of debt – spending by firms on capital goods & bank loan.goods & bank loan.

4.4. Sales declining.Sales declining.

Question 3.7Question 3.7

Cautious approach :Cautious approach :

1.1. Take a holistic approach : Completely understand the Take a holistic approach : Completely understand the realities and possible outcomes from the current realities and possible outcomes from the current situation.situation.

i. External realities : Understand customers, market i. External realities : Understand customers, market conditions, competitive realities; all of the things that on conditions, competitive realities; all of the things that on surfaces cannot control.surfaces cannot control.

ii. Internal Factors: Understand organization specific ii. Internal Factors: Understand organization specific issues and challenges and realities including people, issues and challenges and realities including people, systems, processes, infrastructure, capital etc.systems, processes, infrastructure, capital etc.

Question 3.7Question 3.7

iii. Market realities : It is critical to understand the nature iii. Market realities : It is critical to understand the nature of relationship with customers and how the market of relationship with customers and how the market perceive you.perceive you.

iv. Outcomes : Must define what the target to achieve.iv. Outcomes : Must define what the target to achieve.

2. Spend the money and time in the most productive 2. Spend the money and time in the most productive manner.manner.

3. Capture opportunities that often arise through shifting 3. Capture opportunities that often arise through shifting market and customers circumstances.market and customers circumstances.

4. Taking on new debt in a recessionary environment is 4. Taking on new debt in a recessionary environment is risky and should be approached with caution. risky and should be approached with caution.

3.9 : Related to Solved 3.9 : Related to Solved Problem 9-3 on page 293Problem 9-3 on page 293

• An economics student is asked, An economics student is asked,

• ““How is the economy doing? How is the economy doing?

• Is it strong, or is it in recession?” Is it strong, or is it in recession?”

• The student answers that the economy does not The student answers that the economy does not appear to be strong because inflation is high, and appear to be strong because inflation is high, and energy prices are particularly high. energy prices are particularly high.

• What do you think of the student’s analysis?What do you think of the student’s analysis?

AnswerGlossary of Economic Terms:

i. Strong economy means consists of the economic system of a country or other area, the labor, capital and land resources, and the economic agents that socially participate in the production, exchange, distribution, and consumption of goods and services of that area.

ii. Recession means a contraction phase of the business cycle. The National Bureau of Economic Research (NBER) defines it as a "significant decline in economic activity spread across the country, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

iii. Inflation means as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.

What Causes Economic Recession?

Here are five negative items that could cause an economic recession or even worse a

depression.

• Dollar collapse

• Oil rise - if the price of crude oil were to rise that would be harmful to the economy because of the fact that other prices would rise as well.

• Inflation - this can happen if both the dollar starts to fall and oil prices start to rise. The reason that this happens and is connected to oil prices and the falling dollar is that these factors make it to where consumer goods are more expensive, producers have to increase the prices of their products to make up for the increase in oil prices and to make the same profit that they were making before the dollar fell.

• Housing bubble - if the interest rates on mortgages raised by 2% this could actually stop people from buying houses, which would in turn bust the housing bubble. But on the other hand if the prices of houses dropped or deflating prices, this would deflate household wealth, meaning people would have less equity in their homes.

• Global economy - this is where you are going to need to look at other economies other than your own to see if they are showing signs of a recession because in some cases other countries recessions can greatly impact the other countries depending on how much they rely on imports.

However, there is no definite answer to what causes a recession. It was all of these factors that

slowed the overall demand, which in turn resulted in a recession.

Relationship between

Inflation and Recession

• So does high inflation cause a recession?

In a way yes, but it precedes the recession. Usually, high inflation corresponds with liquidity creation and a booming economy. But after a while the party balloon can get no bigger and it eventually bursts. Liquidity contracts, inflation falls and the economy contracts into a recession.

That is exactly what we are seeing now. The money supply is beginning to contract and the economy is sinking into recession. 

Conclusion

High inflation and strike in energy price could have made a material contribution to an economy recession but the

factors are not the mere indicators for a recession

QUESTION & ANSWERQUESTION & ANSWER

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