Refer to the following UN article
Widening inequality casts a shadow over projected 5.4% global growth in 2021
"While the global growth outlook has improved, led by robust rebound in China and the United States, surging COVID-19 infections and inadequate vaccination progress in many countries threaten a broad-based recovery of the world economy, says the latest United Nations forecast released today.
According to the World Economic Situation and Prospects (WESP) mid-2021 report, following a sharp contraction of 3.6 per cent in 2020, the global economy is now projected to expand by 5.4 per cent in 2021, reflecting an upward revision from the UN forecasts released in January. Amid rapid vaccinations and continued fiscal and monetary support measures, China and the United States – the two largest economies – are on the path to recovery. In contrast, the growth outlook in several countries in South Asia, sub-Saharan Africa, and Latin America and the Caribbean, remains fragile and uncertain. For many countries, economic output is only projected to return to pre-pandemic levels in 2022 or 2023"
Task: You are graduate employee atan International economics think tank called the “Melba” institute and you have been asked to provide some comparative research relating to the findings presented in the article above.
Specifically, you have been asked tocompare the impact of Covid on the Macroeconomy on both a large economy and a smaller developing economy (this country is not limited to those listed in the article but would need to be a smaller economy that trades with one of the large economies such as the US or China).
You are also asked to examine themacroeconomic interdependencies between the large, developed economy and their smaller trading partner. From your findings what can you deduce about inequality in economic recovery as we move to the second part of 2021
Please see some topics that may be relevant to your report below – these are suggestions and not all may be relevant to the countries you choose to examine
Current economic context of both countries: What has been GDP growth / unemployment / inflation in recent quarters? What are the major policy concerns for both economies.
- Balance of payments
- What does the balance of payments indicate about the economies net wealth- what have been recent changes or trends in the balance of payments in the respective economies and what are the key drivers of that change.
- What does this imply about the countries approach to trading consumption across time – historically have they been net lenders / net borrowers
- Has COVID resulted in any major changes in Balance of Trade / the CA / the financial account - (magnitude of change in both economies)
- What can you deduce about both economies from the balance of payments data
Topic 3 - Exchange Rate determination - identify and contextualise what drives the value of the country’s currency
- Have there been recent changes in the value of the domestic currency and what might be driving this - link to the theories of exchange rate determination eg inflation, interest rates etc …Big Mac index PPP
- Identify any major shifts in fiscal or monetary policy - how might this impact on the value of the currency
- What is the role of the respective central banks? Is the exchange rate managed? Is there discussions around a Central Bank Digital currency? How might this impact on the exchange rate
- Are there concerns around capital flows?
- If the exchange rate is flexible how volatile have fluctuations been
- How sensitive is the economy to changes in the exchange rate?
Topics 4 and 5 –
- How might a change in the exchange rate impact of the trade balance.
- How might a chance in the RER come about (change in e or relative prices)
- Estimate which quadrant of the SWAN diagram your country of choice may be operating in?
- What might that predict about the role for policymakers - what should be the policy focus - internal and external balance
Topics 6, 7 ,8 -IS LM BP model applications
- Impact of Expansionary fiscal or monetary policy
- Changes in relative interest rates
- The effect of Covid – (external shock and the adjustment mechanisms)
Map the Macroeconomic interdependencies and spillover effects of policy changes in the large economy
- How exposed are the economies to to external shocks
- How exposed are the economies to internal shocks
- Is there fear of currency crisis – credibility concerns relating to the domestic currency.