Question

Discuss the actual and expected macroeconomic effects

of the COVID-19 pandemic

Answer 1

Introduction: -

The Covid 19 Pandemic came as a surprise to most economists. It has seen one of the worst quarters economically for countries as all struggle to control the virus to the best of their ability.

As a result of the efforts which countries are putting forward on controlling the spread of the disease, one of the most common effects of the disease is that people are stuck in their homes as governments want to keep social distancing as is.

The World Health Organization also has serious concerns over the future of the world, as the disease goes on spreading very easily and the number of infected as well as dead people from the disease go on increasing.

When we talk of macroeconomics, we talk of the economies as a whole instead of smaller one or two consumers or producers. The net current and expected effect of the pandemic on the macroeconomics of countries is as follows: -

Case Details Current as well as Expected Macroeconomic effects: -

1) Reduced Aggregate Demand: -

With people being unable to move out of their homes and are restrained in their houses, one net effect of the pandemic is surely that the aggregate demand for goods and services has been declining sharply.

This has reflected worldwide with countries as developed as the United States growing negatively 30% in terms of their domestic consumption.

Even developing countries have seen as sharp decline in their spending as well as aggregate demand. Countries like India and China which in the past were pioneers of growth are seeing decline in the consumption to the tune of 10-20% respectively.

People are sceptical about moving out of their houses due to fear of spread of the disease and market consumption and overall aggregate demand across countries is low.

There may be some increase in aggregate demand due to the actions of the government and the central banks but this is not going to come any time soon. Which has been explained in detail in point 4) but refers to the relaxations that the government and the central banks have offered.

Recovery will be slow and picking up aggregate demand would take significant time. It is only in the long run that aggregate demand in the future would rise slowly.

2) Reduced Production Levels & Slow or Negative Growth: -

As demand for goods and services would remain low, producers have started making significant losses over the recent quarters. Overall gross domestic product which refers to the total value of final goods and services produced in the country has been falling sharply. This is because low aggregate demand does not allow for producers to produce in the same levels as they earlier used to.

Losses for business owners are at all time high levels during the COVID pandemic and many have had to halt their operations because of the same.

A deep recession is looming on the heads of numerous countries as the pandemic has hit production levels and demand as illustrated above.

It is only in the distant future that production levels may increase slowly and gradually as the economies are opened up and aggregate demand begins increasing due to efforts by the government as well as by the Central Bank which have been illustrated in detail in the upcoming points.

3) Rise in Unemployment Levels

The unemployment levels across all major countries has risen to its peak. This is because as illustrated above, the demand during the recent times is not the same as it was previously and producers are also making significant losses which are accumulating over the quarters.

The resultant is that unemployment across the industries rising many folds. Production levels remaining low means that companies do not require the same levels of employees as they earlier would.

In the distant future when the aggregate demand becomes stable in the long run, the unemployment levels may not be as high as present since the economies will eventually recover and aggregate demand and supply would become stable in the long run.

4) Significant Government and Central Bank Intervention: -

Most governments as well as Central Banks have actively intervened in the markets. With countries such as the United States providing as much as 1200$ in assistance to households to increase the aggregate demand. Tax reliefs have also been provided and the government is trying its best to increase aggregate demand.

The Central Bank which is the supreme banking agency across all countries has been reducing the interest rates which they charge from commercial banks as well as reducing the minimum amount of money which banks must at all costs keep as security. This has allowed for lower interest rates in the economy and commercial banks can give away loans more easily.

For example, if the minimum requirements were 10% of the total cash deposits which has been reduced to 5% now, it means that the banks now have added 5% available with them which can be given away as loans.

In the future, even though these interventions are expected to slow down, yet they would provide the required support to increase aggregate demand, production as well as reduce unemployment which has been explained in the sections above.

5) Reduced International Trade Volumes and Rising Tariffs: -

With most economies experiencing reduced aggregate demand and production as explained above, one current happening is that international trading is very low. This is because countries are looking inwards and are increasing the tariffs which refer to taxes on imports of goods and services.

This is to increase domestic production and to ensure that protection can be given to them from the recent pandemic. In the future even though this is expected to ease out. Yet currently most economies are looking inwards and are restricting imports into the country as far as possible.

The recent tariffs imposed by the United States on goods such as Iron, Steel and Aluminium imported from countries such as India and China to the tune of 20-30% is a great example of the same.

Final Conclusion

We may finally conclude to say, that the Covid 19 Pandemic has largely affected all aspects of macroeconomics. There is a deep recession in most parts of the world with Aggregate demand and supply shrinking in the domestic markets. The international trade is also at all time low and unemployment is gradually rising across the globe.

However, it is expected that this problem would ease out in the months to come with active government intervention wherein most countries are providing relaxations to people and Central Banks have reduced interest rates significantly. All these areas which are in the red today are expected to thus ease out in the distant future respectively.

Please feel free to ask your doubts in the comments section.