Question

You are required to use aggregate demand and aggregate supply analysis, explain in detail how COVID - 19 affect each component of aggregate demand and aggregate supply of Oman’s Economy. (in detail)

Answer 1

COVID 19 has certainly devasted the world in which no country is a particular exception. Now let's analyze the effects in Aggregate demand by component wise.

1. Consumption: This gives the domestic consumption made in Oman. And in most countries, this contributes around 60% of the aggregate demand. Due to the pandemic, the consumer spending has decreased because of the pessimistic outlook of the future, reduced salaries and permanent layoffs in many cases. The people of Oman spend their savings without much income to add on. Therefore they try to consume less owing to the depleting savings  
2. Government spending: Owing to massive disruption in the economy, government spending has increased. Financial stimulus packages, PPE manufacturing, healthcare, etc have contributed to the increased government spending
3. Private investment: This refers to the gross formation of fixed capital. With the negative market sentiments and lot of industrial, business as well as health constraints, these investments have taken a hit. Manufacturing has been very low that it is not able to supplement the agenda of the investment. So, the investment decreases. In some countries, there are active investments going on as well, not in the case of Oman.
4. Nett exports: Exports minus imports. At this point, international trade is stranded. Oil being one of the major exports of Oman have not been actively traded owing to the lesser demand. The countries exporting at the moment are those who are producing medicines, PPEs, test kits, etc. Oman not very specialized with this has a limited export and due to the dearth in these neccessary commodity they import the same from other countries. Hence the nett exports goes negative, or decreases.

Aggregate Supply is the money value of the total consumption taken place in an economy. Components of Aggregate Supply are:

1. National income: This forms the sum of all the wages, rents, profits and interests. As we know, the wages have dropped massively including profits, and with people not having enough money, the interest payments are being defaulted as well. Hence the national income component of the AS decreases
2. Savings: This can be seen in two ways. Due to layoffs and paycuts, the consumers save more than before. But on the other hand, these savings are being utilized to make the ends meet, thereby decreasing the savings. So, in my opinion I would say, the latter dominates, so the savings decrease.

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