ACJC Domestic Macro Prob Tutorial Suggested Responses

1 ©ACJC Econs Dept/2024/Domestic Macroeconomic Problems Anglo-Chinese Junior College Department of Economics H2 Domestic Macroeconomic Aims & Problems TUTORIAL WORKSHEET 1 Section B: Case Studies • Case Study 1: The tale of BRICS (2019 ACJC Term Assessment) • Case Study 2: A Tale of the Two World’s Superpowers (2020 NYJC Prelims) Section C: Essay Questions • Essay Q1: Circular flow of income and impact of government spending on inclusive growth and unemployment • Essay Q2: Economic growth and standard of living • Essay Q3: Causes of negative inflation and importance of various macroeconomic aims Note to students: It is very important for your learning that you thoroughly prepare your answers before tutorials. Your tutors may separately assign you modules from the SLS to supplement your understanding of the topic.

2 ©ACJC Econs Dept/2024/Domestic Macroeconomic Problems Section B: Case Studies • Case Study 1: The tale of BRICS (2019 ACJC Term Assessment) Suggested answers for H2 Case Study Q1 (BRICS) (a) (i) Compare the real GDP in China and India with that of Brazil and Russia from 2012 to 2016. [2] The real GDP in China and India and Brazil and Russia has increased in 2012- 2014. [1] While, real GDP in China and India has increased throughout the entire period, real GDP in Brazil and Russia fell in 2015-2016. [1] OR Real GDP in China and India has also been increasing at a faster rate compared to Brazil and Russia throughout the entire period. [1] (ii) Explain whether the data provided in Table 1 and 2 is sufficient to show that India has achieved sustained and inclusive economic growth. [4] Table 1: Positive economic growth throughout 2012-2016. [1] Data is sufficient to show that India has achieved sustained economic growth [1] However, data provided in Table 1 and 2 (data on GDP and HDI) are insufficient [1] to show that India has achieved inclusive economic growth as there is no data on income distribution or inclusiveness .[1] (Teaching point: need Gini coefficient to explain income distribution.) (Note: Students are to conclude if data is sufficient to show both sustained AND inclusive economic growth and explain why) (b) Extract 1 states that “the fall in commodity prices in 2015 to 2016 has done significant damage in all three countries.” With the aid of a diagram, explain the above statement with respect to Brazil’s real GDP. [6] (Context) Brazil is a commodity exporter of soybeans, iron ore, and crude oil. As such, when the prices of commodities fell, the total export revenue will be affected. Since the demand for Brazil’s commodities is likely to be price inelastic due to the lack of close substitutes, [1] the fall in price leads to a less than proportionate increase in quantity demanded. Hence, total export revenue for Brazil falls. [1] This leads to a fall in aggregate demand (as seen from a leftward shift of AD0 to AD1) [1], which results in lower economic activity in the country and hence real GDP for Brazil falls from Y0 to Y1. Diagram [1]

3 ©ACJC Econs Dept/2024/Domestic Macroeconomic Problems Recognising the significant damage [2]: (Explain the drastic change in real GDP) As seen in Table 1, Brazil was facing positive growth rates before 2015, but it started to face negative growth rates in 2015 & 2016. This shows that the fall in commodity prices led to a significant damage to Brazil’s real GDP. OR (Explain how exports is significant to Brazil) As mentioned in extract 1 “Other BRICS countries rose mainly on the back of their vast natural wealth”, shows that Brazil’s growth was driven by its exports. Hence when there is a fall in exports, this had a significant impact on Brazil’s real GDP. (c) With reference to the information where appropriate, discuss the impact of Industry 4.0 on unemployment in different countries. [8] Introduction: Explain what Industry 4.0 is: As mentioned in Extract 2, it is the fourth industrial revolution, where there are many technological advancements and adoption of information and communication technology. This means that there is a disruption to traditional manufacturing and production processes and could cause a displacement of workers, leading to unemployment. Argument: Industry 4.0 may cause higher unemployment in some countries. The adoption of automation and the greater use of machines in the workplace will result in a lower demand for labour, especially low skilled labour, increasing unemployment. Automation of industries has resulted in the replacement of human labour with machinery and robots as machines could do the same job more efficiently. Hence this reduces the demand for workers or in some cases, eliminates the need for workers altogether, for e.g call centres or telemarketers are now replaced by artificial intelligence. Since Industry 4.0 is likely to affect labour -intensive industries, which tend to replace the low-skilled labour in the firm, these workers might not have the ability to find new jobs easily as the economy progresses towards knowledge -based industries, whe re high skilled workers are needed in the economy to maintain machinery due to the rise in automation. Thus this causes a mismatch of skills and jobs available, and thus leading to a rise in structural unemployment.

4 ©ACJC Econs Dept/2024/Domestic Macroeconomic Problems This is particularly evident in countries, which has emerging economies as it generally has more labour -intensive industries and hence there is a high dependence on lower skilled labour in the BRICS (e.g only 2% of the labour in India is skilled). This is supported by extract 2 where there are two -thirds of all jobs in developing countries, which are susceptible to automation. Also, the proportion of jobs threatened by automation are 69% and 77% in India and China respectively. Thus Industry 4.0 will cause higher structural unemployment in countries with emerging economies. In addition, due to Industry 4.0, there will be a shift in economic power to countries which are more technologically advanced, which are usually more developed economies. As seen in extract 3, this phenomenon will result in shifting of key value- adding ac tivities back to the developed economies and away from economies which are highly labour intensive and used to focus on manufacturing. Hence export demand for countries which focused on manufacturing may be lost to more technologically dynamic competitors, like developed economies, and hence leading to a fall in AD for goods and services in these developing countries. Hence this means fewer jobs will be created, resulting in DD-deficient unemployment in these developing countries. Counter-argument: Industry 4.0 may not necessarily cause higher unemployment in some countries. However, some countries which are technologically driven will benefit from Industry 4.0, as there is a shift of key economic activity back to developed economies. The higher demand for exports will results in higher AD and NY, leading to more jobs created and hence higher employment in these economies. One e.g is India, which instead of focusing on manufacturing, chose to focus on services, with emphasis on IT, and hence benefitted from Industry 4.0. In addition, the impact of Industry 4.0 on unemployment in countries is moderated by slower technology adoption. This gives time for workers to be re-skilled and up- skilled, especially in countries with emerging economies like BRICS, so that they will be prepared for the new jobs that Industry 4.0 will bring about. Many BRICS nations have invested in implementing measures for skill development, as seen in Extract 2, where countries have been increasing education expenditure to increase the no. of vocational trainers by launching nation -wide programmes as well as launching initiatives to equi