Consumption Essay

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Pages: 6
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QUESTION 1

i ) 1936 1946 1956 1966 1976 1986 1996 2006

C/Y | 0.742 | 0.649 | 0.621 | 0.611 | 0.631 | 0.649 | 0.673 | 0.695 | I/Y | 0.103 | 0.140 | 0.165 | 0.167 | 0.160 | 0.167 | 0.158 | 0.174 | G/Y | 0.156 | 0.178 | 0.209 | 0.218 | 0.210 | 0.213 | 0.181 | 0.188 | EX/Y | 0.036 | 0.064 | 0.049 | 0.052 | 0.082 | 0.072 | 0.111 | 0.110 | IM/Y | 0.038 | 0.032 | 0.043 | 0.047 | 0.083 | 0.102 | 0.123 | 0.167 | NX/Y | -0.001 | 0.032 | 0.005 | 0.005 | -0.001 | -0.030 | -0.012 | -0.058 |

ii)

In this question we assume the approximated shares as a fraction of potential GDP using actually GDP. From the data above we can see that the shares of Consumption fluctuate from 61.1% to 74.2% over the 80 years. The shares were stable from 1946 to 2006 and fluctuated about 10% from 1936 to 1946. The shares of Government Expenditure fluctuated from 15.6% to 21.8%. Unlike the shares of Consumption, Government Expenditure remained relatively stable over the decades.

iii)

The overall shares for Exports and Imports were increasing over time. New technologies, equipment, skills and policies that improved over the years could be the main factors that lead the Exports raise. The increases in Imports can be experienced by the higher income and prices over the years. The Net Exports as a fraction of GDP fluctuate between -5.8% to 3.2%. The economy only ran as surplus from 1946 to 1966, in 1936 and from 1976 to 2006, the economy ran a trade deficit. Given that the shares for C, I, G and NX sum to 1, as the EX fraction from 1936 to 1946 increased, the share for Consumption decreased for almost 10%. From 1946 to 1956, the share for NX experienced a decrease from 3.2% to 0.5%, during the same period, the government expenditure and investment in the economy increased. Then NX has experienced a decrease since 1966 and the shares for Consumption of the economy kept increasing over the time and the Investment experienced an increase from 1976 to 1986.

iv)

According to IS curve, ItY = ai- b (Rt - r) and Yt=a-b (Rt-r), we should not expect the share for Investment to change more than the other expenditure component in the table because both investment and output are sensitive to the change of interest rate. A small change in interest rate would be associated with a larger change in output. To prevent the economy either goes to recession or booming, we should not expect the shares for Investment fluctuate too much in order to maintain economy steadily. The actual investment share did not change more than other components as it only fluctuated from 1.6% to 1.7% with the exception of the relatively larger fluctuations from 1936 to 1956. We can say that the share for Investment is very stable due to the fact that it only has an average of about 1% for over 70 years.

Question 2

i)

ii)
As we approximate the shares as a fraction of potential GDP using actual GDP, from the graph we can see that the share for Consumption fluctuated between 60% and 50%. It has fluctuated for about 10% over the decades. The share for Consumption experienced a decline from 1959 to 1974 and then kept increased for about 5 years. There was a significant increase in 1983 and the fraction sharply declined in the following years. The share for Consumption also experienced a smoothed declined from 1986 to 1989. It was very stable from 1990 to 2006. The share for Government Expenditure fluctuated between 20% and 30%. It experienced up and downs from 1959 to 1978. After 1978, the share for Government Expenditure remained relatively stable over the years.

iii)
The share of Exports remained at about 20%. From the graph we can see that there were significant up and downs between 1974 and 1991 and after 1991, it became very stable. New technologies, equipment, skills and policies that improved over the years could be the main factors that lead the Exports raise. The share
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