Thursday, September 13, 2007

Possible IA article + abstract

China Investors Must Rest Easy as Growth Surges: Andy Mukherjee
Abstract: On April 19th of 2007, Beijing claimed that China's GDP has grown 11.1% in relation to 2006--indicating an immense leap in the economy. Despite assumptions that the authorities would "tighten monetary screws", no monetary policy has been established in order to slow down the rapidly growing economy, for, as claimed by Jonathon Anderson, UBS AG's cheif Asia economist in Hong Kong, "interest-rate adjustments and base-money liquidity tightening have no real impact on equity demand." As a result of this high growth rate in China, prices are beginning to climb. Nevertheless, "the government isn't in a hurry to cool the economy".

Saturday, September 1, 2007

Chapter Sixteen: Phillips Curve (Article + Short Analysis)

German August Unemployment Falls as Economy Expands
This article states that Germany's economy is rapidly growing, causing unemployment to fall to an all-time low. According to the article, "German unemployment will fall to the lowest average level in 14 years in 2008 as persistent growth spurs hiring...". As the economy is growing and new businesses and firms are being established, factories must be expanded, and more workers and employees are demanded. This will most likely not only increase the number of people in the work force with jobs, but will also increase the amount of people in the work force. This is due to the fact that those initially out of the work force will notice the rapidly growing economy and will therefore decide that perhaps the opportunity cost of not working is greater than that of being hired to work.
The fact that the amount of people in the work force with jobs will increase with the growing economy means that the unemployment rate will decrease. Despite the claim by this article that the decrease in the unemployment is beneficial to the economy, analyzing the situation using a Phillips curve will prove otherwise. The Phillips curve draws the relationship between the unemployment rate and inflation, illustrating the fact that as unemployment decreases, the level of inflation will rise (graph needed here). This can also be seen on the graph of the economy showing the aggregate demand and supply. The article states that consumer confidence is rising, signifying an outward shift of aggregate demand. As the AD curve shifts out (second graph needed here), it will intersect the Short-run AS curve at a higher level of output (i.e. lower unemployment), but also at a higher PL (i.e. a higher level of inflation). However, this solely shows the short-term effects of the increased aggregate demand. The increased price level will cause nominal wages to rise as employers will need more money to buy every-day goods. This increase in wages means higher costs of businesses, leading to an inward shift of Aggregate Supply. As can be seen with the Long Run Aggregate supply curve, the level of output will decrease back to its original point, while inflation will be much higher.
Therefore, despite the article's claims that this decreasing level of unemployment in Germany is beneficial, it is important to note that once the unemployment level is at a point beyond the level of full employment, high levels of inflation will result.