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The following is a list of Asian economies you can select from for your group’s selected country.
Based on research undertaken under this assignment you will evaluate the economic performance of your selected countries overt the period 2011 - 2015.
Economic growth and the Business Cycle
With reference to your selected economies:
Aggregate Demand – Aggregate Supply
Identify two determinants of aggregate demand and two determinants of aggregate supply that have impacted on the level of economic activity for your selected economies in the past 12 months – i.e. 2015.
Prices and the inflation rate
Examine the situation of inflation over the past 2 years, 2014 – 2015.
List and illustrate the inflation rate in the past two years (use data for the Consumer Price Index (CPI) OR the GDP Deflator for your selected economies).
The Labour Force and unemployment
List and illustrate the changes in the Labour Force, unemployment and unemployment rate over the past two years.
Identify and explain the types and causes of unemployment which have prevailed over the period for each of your two economies.
Exchange rate and its impact on economic activity
You should examine:
Which of the two economies you have selected have had the better economic performance? Explain your answer giving 3 reasons (criteria) for your choice.
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In China, the annual inflation rate for the year 2014 was 2%, dropping to 1.44% in 2015. The low inflation was as a result of falling costs of commodities and a reflection of excess capacity and stiff competition in the country’s industrial landscape. The slow rise in consumer prices was a worrying trend as business activities needed an increase in prices to encourage investment in the economy. China can be said to be experiencing a cost push inflation. Although the rate of inflation has been decreasing on an annual basis and it can be considered as a form of deflation, the reason for the decrease is similar to that of cost push inflation. In cost push inflation, prices increase because of a decrease in supply. In China, inflation has been decreasing because of increase in supply.
Table 1: The monthly inflation in China and India
Source: World Bank data (2015) & ADB (2016)
Figure 1: The monthly inflation in China and India
The inflation rate in India in 2014 and 2015 was 5.88% and 6.37% respectively (World Bank, 2015). With major global economies experiencing deflation, this would be considered to be somewhat stable. Inflation in India is mostly as a result of global trade of commodities and efforts by the reserve bank of India to weaken the Indian versus the United States dollar. India’s inflation can be considered to be demand pull inflation. This is because India is mostly an outsource destination with most of its exports supplied to the US which has been experiencing stable growth (countries, economies and regions, 2016).
1. THE LABOR FORCE AND UNEMPLOYMENT RATE
Howell, 2004 submit that he types of unemployment available are frictional, structural and cyclic. Frictional unemployment occurs when there is a transition from a given point. Cyclical occurs as a result of the seasonality of the business environment. Structural is as a result of a mismatch in skills of the labour and the skills required in the market.
The unemployment rate in India was 4.9% in 2014 and in 2015, the rate was at 3.6%. The Indian labour force is the second largest in the world with over 400 million people in the group. The labour force is mostly comprised of young people. The number of women unemployed in India is also large, with most women especially those with vocational training not being able to find work. The causes of unemployment in India are as a result of the cyclic nature of agriculture which employs about 50% of the labour force. A few cases of unemployment are structural as a result of industrialization wiping out cottage industries. The largest cause of unemployment in India is as a result of frictional unemployment which is caused by an increase in the intake of the number of people joining universities (India and ADB, 2016).
The unemployment rate in China was 4.7% in 2014 and 4.1% in 2015 (China Unemployment Rate, (n.d). The Chinese labour force is mostly made up of migrant workers from the neighbouring countries and also a large population from rural areas outside the cities. During this period, the number of workers both migrant and rural china has been decreasing. This means that the demand for labour increased and so did the cost of labour. The cause of unemployment is mainly because of frictional causes resulting from the transition of people from school.
The Yuan has not been a free floating currency. The currency fluctuated between 6 yuan to the dollar at the beginning of 2014 weakening to 6.5 to the dollar at the end of 2015 (China Unemployment Rate, n.d.). The Chinese government has been holding the Yuan at a fixed rate to the United States Dollar. This was done to ensure that Chinese produce is cheaper in the world since the US Dollar is the main currency used in the world. Cheap Chinese goods ensured that the demand for Chinese products would be high. Although the yuan was weaker vs the dollar, the dollar was strengthening when compared to the currencies. This, in essence, resulted in the Yuan strengthening when compared to other world currencies making their goods a little more expensive and hence resulting to slow growth in the long run.
The Indian Rupee during the year 2014 fluctuated between a low of 59.2 and a high of 62.8. This means that the Rupee was relatively stable as compared to the US dollar. It is worth noting that during this period the US economy was doing really well improving from the 2007-08 recession (United States Department of Agriculture Economic Research Service: Agricultural Exchange Rate Data Set (2016)). This growth caused the dollar to appreciate compared to other economies. The rupee being able to maintain stability versus the dollar showed a sign of stability of the Indian economy during the stated period. Currency movements are affected by fiscal policy and balance of payment. The Chinese government actions are fiscal payment example while improved exports from India are as a result of the balance of payments.
The AD-AS diagram
The aggregate demand-aggregate supply model explains price level and output relationship in terms of demand and supply. Currency movements are affected by demand and supply both in terms of balance of payment and inflation. With a high demand for goods, a currency will strengthen compared to another currency while a low demand will cause it to weaken. A high supply of goods as compared to demand will result in the weakening of a currency as compared to the other currency.
The Chinese economy had a better economic performance during the period compared to the Indian economy. In China, the main type of unemployment experienced in the economy was frictional unemployment. This means that the country had more skilled labourers joining the workforce as compared to India. Frictional unemployment is usually for a short period of time and most of the workers will after a while be absorbed. In India, the Case system created structural unemployment preventing some groups of people from joining some types of work no matter how qualified they are. This means that the uptake of labour will be lower in India than in China because of cultural reasons that will also be difficult to eradicate. This is also the case with women who are discriminated in India as compared to China. During the period, the Chinese economy is considered to have fared better than the Indian because the Chinese economy moved people from rural areas to urban areas while the Indian economy had most of its population in agriculture.
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