Question

2. COVID-19 shock

a. Discuss the impact of COVID-19 shock on each component of output (recall the income-expenditure identity Y = C + I + G + NX).

b. Discuss the impact on the Canadian labour market, specifically employment number and unemployment rate.

c. There are many examples of asymmetric impacts of the virus. Discuss the impact of the quarantine on different types of consumption: durables, semi-durables, and non-durables. Discuss the impact on the services sector versus manufacturing sector.

d. Explain how the upcoming recession due to COVID-19 is different than the Great recession of 2008-2009.

Answer 1

1.

a) Impact on Consumption (c)- People will now like to save more because of the uncertainty of income level in future, so, it will fall.

b) Impact on private investment (I) - Due to low consumption and a pessimistic future, investors will not want to invest much, so, this will also fall.

c) Impact on government expenditure (G) - Government will increase its expenditure in order to boost the economy again and will give bailout packages to the failing industries along with increased unemployment benefits as unemployment will also increase.

d) Impact on net exports (NX) - although both the exports and the imports will decrease due to interuppted supply chain and low demand all over the world but the net effect will depend upon whether exports fell more than the imports or otherwise. Thus, effect on net exports is ambiguous.

2. Due to lower consumption many businesses will fail and companies will shutdown. This will increase the unemployment in the country leading to a fall in the number of employed people. This will occur mainly due to leftward shift of labour demand curve in the industry which will lead to increased unemployment along with lower wages.

3. Due to quarantine, demand for consumer durables like automobiles, refrigerators, televisions etc. will fall very sharply. Also, semi-durable goods like clothes, footwear etc. will also take a hit. But demand for non-durable goods, mainly food products and products for personal hygiene will increase because the period of quarantine is very uncertain and nobody knows how long it will last, so, people will try hoarding these non-durable items as we have seen in USA, where there was an excess demand for toilet paper.

The manufacturing sector has been hit hard by this pandemic because factories have to be shut for long due to lockdowns in various countries. But service sector is still going on as people are working from home but the demand for services has also fallen because of lack of money and an uncertain future on the side of consumers. This can be seen in the lay-offs that the service sector is making and if not lay-offs, salary cuts are being made.

4. The recession which is about to come is very different from the Great Recession because it is purely because of the healt crisis and not financial crisis as the Great Recession. Also, people were still working at the time of Great Recession but COVID-19 has brought the economies to stan still because people cannot go outside and work. This is a very big problem in countries like India, where a large part of the population works on daily wages to whom working from home is not possible.

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