Question

Firm dynamics in the COVID-19 crisis. Analyze the impact of the COVID-19 crisis from a firm dynamics perspective. Assume that the productivity of all firms is the product of an economy wide parameter z times an idiosyncratic firm-level productivity that varies by firm and over time as an AR(1) process. What does the basic model predict regarding entry, exit, employment, wages? How does the policy of loans converted to grants to keep employment at the firm level affect the equilibrium?

Answer 1

The outbreak of COVID-19 has severe adverse effects on the global economy. It has also impacted the business, consumer behaviour, ethical issues, and several other economic activities to a greater extent.

As watching the pandemic's disastrous spread the investors and producers have slowed down their investments and productions and are waiting the situation to come under control. Subsequently, the pause in the business cycle has resulted in a dramatic rise in unemployment and chaos within the international market economy.

During the lockdown period, workforce shortage was faced by the firms. Hence, the number of employess and labourers were replaced by modern tools and techniques which helped to cope up the lagging of the total output. Thus, doing this the losses were somehow controlled and more revenue was generated in the tough times too. The demand and supply chain in the market was balanced although the level of consumption decreased to an extent.

While busineses can revive using various methods or measures to enhance productivity and trade but the employees and workers who were loosing their jobs and facing wage-cuts hard hitted the same business by fall in their consumption and demand in the economy for different goods and services.

Under the government economic reform policies during the COVID-19 crisis, its loan facilities were converted into financial grants and aids which were offered to different sectors of the production and business fields. Inorder to provide more employment and eradicate increasing unemployment issues within the economy.

Moreover, the grants supported the process of production too by removing the loan liability pressure on the investors and work out freely. Further, it benefitted the employees by getting work as per their skills and potential and full wages they deserve without any deductions. The increased production helped to rise the GDP growth too by balancing demand and supply cycle and international trade (exports).