Economics essay

Economics essay

ECO 502 – Selected Topics in Macro

December Intersession 2017 Essay Assignment 1

Dr. Michael S. Miller

Answer both questions:

1) Economic data and the signals they contain are central to business conditions analysis. Economists focus on direct signals and indirect or causal signals. First, explain with examples (not examples taken from the text or lecture) what is meant by a “direct signal” and then what is meant by an “indirect signal”. To illustrate the point further consider the very important macro indicators of employment and the wages that employment generates. To make it interesting let’s consider a different country – the Kingdom of Bahrain. Bahrain, like other Middle East producers of energy, has been through some interesting times of late. With the Arab Spring, the drop in the price of oil, etc., the economy is, well, unsettled. According to the Bahraini Labour Market Regulatory Authority’s quarterly reports we have the following data regarding working Bahraini citizens (one BD, or Bahraini dinar, equals $2.67):

Indicator 2015Q3 2016Q3
Employment 158,426 157,426
Median Monthly Wage, Private BD396 BD382
Median Monthly Wage, Public BD685 BD673
Inflation, Year over Year 2.7%

Your job is to speculate on the various direct and indirect macroeconomic signals that may be contained in these data. When it comes to direct signals, tell me explicitly what the direct signals are about employment and wages. Be sure to distinguish between real and nominal changes. When speculating on the indirect signals an analyst could get from these data please feel free to be creative – speculate on what kind of correlations you find between employment and other aspects of the economy such as households, firms and the government. If it would help, assume for the moment you are a Bahraini – what might these data mean to you and your household’s economic behavior and what would that behavior do to the economy as a whole? (1.5 to 2 pages, double-spaced, for this question)

2) In the initial lecture on the economic way of thinking we considered the description of cost-benefit analysis in macroeconomics offered by Henry Hazlitt. Some years back policy makers in the Kingdom of Bahrain were faced with rising inflation caused by the fall in the international value of the US dollar. The dinar is pegged to the dollar, so when the dollar goes down the BD goes down. A weaker dollar/dinar means that anything and everything you buy from overseas costs more. You also know that inflation over time can be caused by putting too much money into the economy and that a rise in prices of necessities can hurt consumers, especially low-income citizens. The government agreed at the time to give each low-income Bahraini household (but not non-Bahraini residents, who represent 52.7% of the Kingdom’s population and 70%-plus of its workforce as of the 2010 census) BD50 (equal to $133) monthly to make it easier to buy what food they needed. First, please explain in your own words Hazlitt’s lesson, and second, explain how the lesson would assist an analyst in organizing an evaluation this policy. You need not tell me if the policy makes sense or not; tell me rather how you would go about deciding if the policy makes sense. What questions would you ask and why? To be complete, draw upon any other relevant ideas contained in the economic way of thinking (e.g. real versus nominal, disinterestedness) to explain how someone should approach the analysis of this policy. (1.5 to 2.0 pages, double spaced)

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