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DMS ECO2103 Macroeconomics

Instructions for CA1 Individual Assignment, January 2024 Semester

Important Dates for CA1 Report

CA1 Deadline:  24 January 2024 (Wednesday), 11.59 am

Submit your report via Canvas. Only reports submitted via Canvas will be accepted.

The distribution of marks will be as follows:

1.    CA1 30%

2. CA2 (online quiz) 20%

3.    Final exam 50%

CA2 opens on 24 January 2024 12 noon and closes on 31 January 2024 11.59 am (Topics 1 - 6)

CA Submission

. CAs must be submitted online via Canvas.  Please  read through  instructions  in  Canvas  and CA outline carefully before submitting. If you have further queries, please read the FAQ. If after you have read the FAQ, you need assistance on Canvas submission, please email to itsd_simge@sim.edu.sg or call 6248 9393 Option 4. For non-Canvas issues please email he10@sim.edu.sg. Please email with your "Live@Edu email account". Email from other addresses will not  be entertained. If issues raised are covered, you will be directed to read through instructions in the CA outline,  Canvas and the FAQ. Please take time read through before raising issues.

SAMPLE – TOPIC 1

Article

Japan’s economy sinks deeper into worst postwar contraction, intensifies challenge for new leader

TOKYO (REUTERS) - Japan’s economy sank deeper into its worst postwar contraction in the second quarter as the coronavirus jolted businesses more than initially thought, underscoring the daunting task the new prime minister faces in averting a steeper recession.

Other data put that challenge in perspective, with household spending and wages falling in July as the broadening impact of the pandemic kept consumption frail even after lock-down measures were lifted in May.

The world’s third-largest economy shrank an annualised 28.1 per cent in April-June, more than a preliminary reading of a 27.8 per cent contraction, revised gross domestic product (GDP) data showed on Tuesday (Sept 8), suffering its worst postwar contraction.

The record drop roughly matched a median market forecast of a 28.6 per cent contraction in a Reuters poll.

The main culprit behind the revision was a 4.7 per cent drop in capital expenditure, much biggest than a preliminary 1.5 per cent fall, suggesting the COVID-19 pandemic was hitting broader sectors of the economy.

“We can’t expect capital expenditure to strengthen much ahead. Companies won’t boost spending when the outlook is so uncertain,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

The data will put the new prime minister, to be elected in a ruling party leadership race on Sept 14, under pressure to take bolder economic support measures.

Chief Cabinet Secretary Yashihide Suga, a frontrunner to become next premier, has signalled his readiness to boost spending if he were to lead the country.

Japan recently saw a renewed rise in infections but has been spared the kind of big casualties seen in western countries. Total infections stood at 72,321 as of Monday, with 1,380 deaths versus a global tally of over 27 million cases and more than 888,000 deaths.

Japan’s economy has shown some signs of life after slipping into three straight quarters of contraction, with factory output rising in July at the fastest pace on record due to a rebound in demand for automobiles.

In a sign of any recovery will be modest, however, separate data release on Tuesday showed household spending fell a bigger-than-expected 7.6 per cent in July from a year earlier. Real wages declined for the fifth straight month in July, pointing to possible deeper strains ahead for consumer spending.

BROAD IMPACT

The health crisis has ravaged a broad array of sectors, with firms such as automaker Honda Motor forecasting a 68 per cent decrease in annual operating profit and cosmetics firm Shiseido Co expecting a net loss for the full year as the pandemic hit cosmetics sales.

The fresh batch of data will be among factors the Bank of Japan will scrutinise at its rate review next week, when it is widely expected to keep monetary settings unchanged.

Analysts polled by Reuters in August said they expect the economy to shrink 5.6 per cent in the current fiscal year to next March, and grow just 3.3 per cent in the following year, compared with the BOJ’s forecast released in July for a 4.7 per cent contraction and 3.3 per cent growth in the same periods.

The central bank eased monetary policy twice this year including by setting up a lending facility to pump money to cash-strapped small firms, complementing two big government spending packages.

Many analysts expect the BOJ hold off on ramping up stimulus for now as steps to spur demand could get people moving more freely into shops and risk spreading the virus.

“Even though restrictions to economic activity have been relaxed, some of them will remain under the new lifestyle forced upon by the pandemic,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

“It will probably take a long time for the economy to normalise and return to levels before the pandemic.”

SAMPLE - TOPIC 1

REPORT

1.1 Source:

https://www.straitstimes.com/business/economy/japans-economy-shrinks-more-than-first- estimated-in-q2-heightens-woes-for-new

1.2 Summary

Due  to  the  Covid- 19  pandemic,  movement  was  restricted  globally,  and  Japan’s  gross  domestic product has suffered a contraction from the past two quarters, with their economy falling by 28.1% in April-June. Analysts forecast that Japan’s economy would decrease by 5.6% in the current fiscal year, on the account of falling household spending and wages, low capital expenditure and trade restrictions. As a  result, the government has taken economic measures  in their attempt to  raise their GDP.

1.3 Analysis

Through applying the expenditure approach, it is possible to calculate GDP using the formula of GDP =   Consumption(C)   +   Investment(I)   +   Government   Expenditure(G)   +   Net   Export(Exports(X)   – Imports(M)).

From  the  source  article,  it  can  be  deduced  that  the  decrease  in  GDP  was  contributed  by  the decrease in consumption, investment, exports, and imports. The main reason that consumption(C) decreased was due to the fall in wages and household spending. According to (Hermesauto, 2020), the fall in household spending was caused by lower income through job losses amid the recession during the pandemic.

Additionally, capital expenditure had dropped by 4.7%, which decreased investment(I). In general, the low consumption and demand, along with big companies like Honda Motor and Shiseido facing decreased profits and net losses has made companies wary about spending.

The restriction in movement would also impact Japan’s trade industry, resulting in a decrease in the country’s exports(X) and imports(M) .

In  hopes of combating the  recession and  increasing GDP, the government had  implemented two stimulus packages that according to (Kyodo, 2020) is aimed towards helping low -income households and  provide  interest-free  loans  to  struggling  companies.  The  aim  is  to  provide  consumers  and businesses with more disposable income to encourage spending, which  increases consumption(C) and  Investment(I).  However,  despite  the  government’s  efforts,  GDP  failed   to  show  signs  of improvement.   Furthermore,   since   the   stimulus   packages   are   a   form   of   transfer   payments, Government Expenditure(G) stays the same.

By applying the information above to the expenditure approach assuming no additional information is added, it would result in GDP = C + I +   G +  NX (  X -  M). Hence, the implications caused by the pandemic led to the continuous decrease in Japan’s GDP.

SAMPLE - TOPIC 2

ARTICLE

India's October CPI likely above 7% again, industrial output falls: Reuters poll

BENGALURU (Reuters) - India’s retail inflation likely stayed above 7% for a second straight month in October as supply distortions led to a surge in vegetable prices, especially of onions, a Reuters poll showed, lowering the chances of further interest rate cuts.

Disruption from by the coronavirus pandemic and excessive rainfall in states such as Maharashtra, Karnataka and Andhra Pradesh have damaged and delayed the harvesting of onions - a key ingredient in Indian kitchens - alongside other vegetables.

A Reuters poll of 50 economists conducted from Nov. 4-9 predicted consumer prices rose 7.30% last month from a year earlier, a touch lower than September’s 7.34% rate.

If realised, it would be above the top end of the Reserve Bank of India’s medium-term target range of 2%-6% for the seventh consecutive month, a streak not seen since August 2014.

“India’s recent inflation trajectory is driven by a confluence of seasonal supply-side drivers lifting the food segment, magnified by COVID-19-led disruptions, hindering inter-state transfer as well as provision of general services,” said Radhika Rao, economist at DBS Bank.

“Price and tax rigidity in commodities has also added to the boost.”

Demand remains weak in Asia’s third-largest economy, which contracted at the sharpest pace on record of 23.9% in the April-June quarter, as the ongoing pandemic left millions unemployed and resulted in massive pay cuts. India has the second-highest total infections in the world at more than 8.5 million cases.

The poll also predicted industrial output in September dropped 2.0% from a year earlier, the seventh consecutive month of falls and its longest streak of decline since June 2009, as infrastructure output, which accounts for about 40% of total industrial production, contracted 0.8%.

Still, the RBI, which has eased its key repo rate by 115 basis points since March, was widely expected to wait until February before cutting the rate again amid worries over higher inflation.

“We see a space for a rate cut in the February policy meeting as the RBI leans towards stimulating growth and acts at the first window it gets when inflation drops within its target range,” said Sakshi Gupta, senior economist at HDFC Bank.

“That said, we think the RBI is towards the end of its rate cutting cycle and there could be a prolonged pause as inflation concerns linger on.”

SAMPLE - TOPIC 2

REPORT

2.1 Source:

https://www.reuters.com/article/india-economy-poll/indias-october-cpi-likely-above-7-again- industrial-output-falls-reuters-poll-idUSKBN27Q0ML

2.2 Summary

Disrupted supply chains due to the COVID- 19 pandemic as well as severe weather in many states in India reduced the amount of production in agriculture and industry. This has caused India’s retail inflation to rose above 7% in October 2020 compared to the same period last year.

2.3 Analysis

Obviously from the article, the heavy rain has damaged and delayed the harvesting of onions, a key ingredient of the Indian dish. The shortage of raw materials, as well as the high transportation costs due to nationwide lockdown, caused the costs of raw materials to rise, which leads to the reduction of production output by manufacturers. This will create a shortage of output at existing price level, price level will climb, and inflation occurs.

The same trend  is  repeated  in  the  industrial  sector.  Furthermore,  many  Indian  factories  depend heavily  on  imported  raw  materials  from  China.  China  is  one  of  the  countries  most  affected  by COVID- 19,  hence the supply of industrial  production in India  is  interrupted or scarce, causing the cost of raw materials to rise. This leads to an increase in the producer price index (PPI), which will be passed on to consumers in the higher retail prices.

In both above cases, there is a combination of higher price and lower output, which causes cost- push inflation to occur. The economy has a simultaneous appearance of inflation and recession, this phenomenon is called as stagflation.

The  above  graph  indicates  that  there  are  lesser  resources  available  in  the  economy  to  produce output,  then  the  Supply  Curve  decreases  (shifts  leftward,  from  AS1  to  AS2),  whereas  consumer demand remains (AD). Cost-push inflation occurs when manufacturers respond to increasing cost of raw materials by increasing their prices (from P1 to P2) to protect profit margins. As a result, real GDP also drops (from Q1 to Q2) .