Question

During the current COVID-19 pandemic many countries have imposed quarantine on their populations in order to limit/ stop the spread of the disease and avoid overload on the health system. While these measures are justified from the health perspective, they have major economic consequences. In this assignment you are asked to analyse different economic aspects related to the COVID-19 pandemic

Part 1 GDP and unemployment

a) Analyse the effects of quarantine on GDP, employment and the unemployment rate. Which industries are likely to be most affected and which industries are likely to be least affected by quarantine measures? b) Choose any country that introduced quarantine as an example. What was its GDP growth rate in 2018, 2019? (Indicate the source of information.) Is this country likely to be in recession this year? Refer to two definitions of recession. c) Are your answers consistent with (general) Okun’s law?

Part 2 Inflation

a) What do you think would happen to inflation in your chosen country in the coming year? Explain. Demand components: Consumption b) What factors usually determine individual consumption? In light of these factors analyse how the situation with the COVID-19 pandemic is likely to affect aggregate consumption. Use the theory studied in the course in your answer. You may want to provide some examples for your chosen country.

Part 3 Demand components:

Investment and net exports Analyse the effects of the COVID-19 pandemic on investment and trade (exports and imports, in particular). Refer to the theories studied in the course. Provide some examples from your chosen country. Do you think investment and trade will also be affected after the pandemic is over? Explain.

Part 4 Government’s role in the current pandemic Governments in many countries introduced various policies and mechanisms to assist their economies during quarantine. Analyse the measures introduced in your chosen country. Do you think they are effective in assisting the economy? How do these measures affect the budget and debt position of the government? Discuss whether they are sustainable.

Answer 1

As mentioned in the question above COVID-19 has hit the economies like never before. IMF and other global organisations have predicted global recession leading to loss of global GDP of around 3.5 %.

( a ). To contain the spread of the virus governments across the world have forced closure of schools, colleges, and businsses in order to maintain social distancing.

No doubt, the closure of businsses has led to unemployment rates reaching as high as 25% across economies around the world. With no production or any sort of businesses taking place most of the economies are expected to see negative GDP growth rates in this fiscal year.

The industries that are most likely to be affected are manufacturing, auto and construction as they require workers as well as consumers. Auto sales, tourism and hospitality are other sectors that are likely to be hit the hardest.

Services industries that require workers to work from home such as software and IT services are are likely to be least affected.

( b ) Let us take the example of the US. The GDP growth in the US was 2.9% in 2018 and 2.3% in 2019. This information can be found on the website of the bureau of economic analysis, US government. The country is forecasted to see negative GDP growth at least this fiscal year.

A country is said to be going through recession when it faces negative GDP growth for two successive quarters.

The other definition of recession says it is a significant decline in economic activity, lasting more than a few months.

Okun's law states relationship between unemployment and GDP growth rate. It says for every 1% increase in unemployment rate, the potential GDP rates will fall down by 2%.

Yes, the expected fall in GDP growth rate is more or less similar to what Okun's law states.