Question

Economists are unique in how they think about, analyze and solve problems. Gwartney, Stroup and Sobel outline eight principles of economic reasoning to help understand how economists approach policy issues. Using the social, political and economic issues surround COVID-19, discuss how the pandemic applies to or demonstrates at least three of the principles listed below. Be specific in your explanation and provide sufficient detail to show both your understanding of each principle included and its connection. a. Incentives matter. b. Resources are scarce and opportunity costs exist. c. Economics agents attempt to maximize or minimize when making choices. d. Economic agents make decisions at the margin. e. Information is costly. f. Economic actions often generate externalities. g. Value is subjective. h. The best test of any theory is its ability to predict

Answer 1

a) The COVID-19 outbreak has had a swift and volatile impact on business operations and the financial markets. Because this is occurring simultaneously with the annual incentive award cycle of many companies, immediately at issue is how companies will address incentive setting and employee retention in this rapidly changing environment.

Companies may consider delaying setting long-term performance award targets until the market is somewhat less volatile, while proceeding with other incentive components. If companies choose to set long-term performance targets now, they may consider using relative as opposed to absolute performance metrics and providing the plan administrator with sufficient discretion to adjust awards when ultimately determining achievement levels.

If the board or compensation committee is thinking of adjusting long-term incentives granted in prior years, consideration should be given to the plan terms regarding adjustments, whether they are grandfathered for Section 162(m) purposes, and the accounting and disclosure ramifications of any changes, which should be balanced against the overhang of the awards and their reduced retentive value.

b) The benefit of every action should be weighed against the missed benefit of the action not taken. Opportunity costs are by definition unseen and thus can be easily overlooked.

The extensive actions taken by governments to limit the spread of COVID-19 are hurting the economy too much.

Economic depressions carry a plethora of bad effects and limit our future options. It is well established that economic depressions lead to more stress-related deaths and suicides. But utilizing our scarce resources to battle COVID-19 at all costs, thus sacrificing our economic well-being and limiting our future growth.

Also means that we will be relatively poorer in the future and may then be unable to save as many lives then as in an alternative scenario where we do not use such drastic measures against the pandemic.

c)

• COVID-19 has struck at the core of global value chain hub regions, including China, Europe and the US.
• Industrial production in China has fallen by 13.5% in January and February combined, compared with the previous year.
• The pandemic has severe implications for international production networks and may leave its legacy for years to come.

If the global economy is to avoid prolonged economic distress, a coordinated policy response, as advocated by the United Nations and other multilateral policy institutions, serves as possibly the most promising path out of a looming economic crisis.

The discussion around current and future policy responses has seen increasing calls for national re-examination of established economic models, in particular with respect to the international production of goods.

If anything, COVID-19 shows that it may perhaps be too simplistic to base decisions about production locations solely on such easily observable economic factors. Many companies may not fully appreciate their vulnerability to global shocks through their supply chain relationships and the costs this imposes.

The COVID-19 pandemic calls for increasing our effort towards strengthening multilateral approaches to policy making and assisting countries in opening up other ways to enable inclusive and sustainable industrial development.

d) The Government’s Emergency Committee for Prevention of COVID-19 meets every two days to assess the situation and initiate relevant actions. The government has already allocated Af 8 billion (0.5 percent of GDP) for emergency pandemic response, of which Af 1.9 billion (0.1 percent of GDP) for urgent health needs, such as:

i) Establishing testing labs, including at border crossings.

ii) Setting up special wards to boost hospitalization and care capacity.

  iii) Procuring the most critical medical supplies. The authorities plan to spend about 2 percent of GDP for critical pandemic-related spending during the year, with about one third directed to health.

The government has developed two macroeconomic scenarios with distinct assumptions regarding the depth and duration of the pandemic. It is working to identify non-essential spending that can be curtailed to create space for pandemic-related spending, including social relief package for the affected households and measures to prevent permanent damage.

The authorities increased the frequency of Financial Stability Committee meetings, enhanced the monitoring of early signs of liquidity stress, and reviewed banks’ business continuity plans.