EXERCISE ANSWERS UNIT 13

UNIT 13
EXERCISE 13.1 BETTER LIFE INDEX

The Better Life Index

The OECD is an international
(tinyco.re/2887644), was created organization based in Paris, with 35
by the Organisation for Economic member countries, most with high
Cooperation and Development levels of GDP per capita. It was formed
in 1948 to facilitate postwar
(OECD). It lets you design a reconstruction in Western Europe. The Parama Chaudhury
measure of the quality of life in a OECD is an important source of
UNIVERSITY COLLEGE LONDON
country by deciding how much internationally comparable statistics
weight to put on each component on economic and social performance.
of the index.

1. Should a better life index include the following elements: income,

housing, jobs, community, education, environment, civic engagement,
health, life satisfaction, safety, or work-life balance? For each of these
elements, explain why or why not.
2. Use the Better Life Index tool to create your own better life index for
the country where you are living. How does this country score on the Eileen Tipoe

topics that are important to you? UNIVERSITY COLLEGE LONDON

3. Rank the countries in the database using your newly created better
life index, and compare it with a ranking based exclusively on income.
4. For both of these indices, choose two countries with contrasting
rankings and briefly suggest why this may be the case.

Introduction

The aim of this question is to get students to think about how to define how
“well-off” a country is. Much of the rest of the unit will refer to standard
economic outcomes like GDP, consumption, investment, unemployment, and
inflation, so this question is an acknowledgement of the fact that other (and
broader) measures of wellbeing exist.

Answer

1. The inclusion of each metric is justified below, with some caveats.

Income: Higher income may lead to greater well-being, e.g. due to improved
access to education, healthcare, or diet. On the other hand, beyond certain
levels of income/wealth the importance of income for well-being may diminish.
Housing: Determines the conditions where people live, and has an impact on the
basic needs we have, such as safety and privacy, which in turn affect our well-
being.

Jobs: Apart from the obvious benefit of wage (see income above), jobs have
positive externalities stemming from creating networks. They may also build
self-esteem and develop skills. The fulfilment and personal development that
some people derive from their jobs is a source of well-being.
Community: Quality of our relationships is an important determinant of well-
being. The way we interact with others affects our mental health.
Education: Builds knowledge, skills, networks, and increases expected wages.
There are also social benefits, such as civic participation and lower crime rates.

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EXERCISE ANSWERS UNIT 13

As with jobs, the fulfilment and personal development from education can be an
important source of well-being.

Environment: Just as our personal space (housing) affects our well-being, so

does the communal environment. Having access to green spaces or clean air
may reduce stress and improve mental health.
Civic engagement: Transparency is an efficient way to fight corruption. Hence,
the risk of public funds' mismanagement and fraud are diminished. These funds
can be spent on projects that improve well-being e.g. sports facilities,
infrastructure.

Health: There are clear benefits to a healthier society, such as longer life
expectancy, increased productivity, and reduced healthcare costs.

Life satisfaction: There is no objective measure of happiness. Nevertheless,

subjective surveys on overall life satisfaction may be an important complement
to the objective measures above. People’s perception of their living situation
also affects their well-being.

Safety: Physical pain, loss of property, or feelings of vulnerability have adverse

impacts on our well-being.
Work-life balance: Finding a balance between work and family commitments
may be an important determinant of our well-being.

An important factor that may be missing is the level of income/wealth inequality

since surveys have shown that our level of income/wealth relative to others can
matter more than the absolute level.

Students may also note that income is a necessary condition for most of the
other dimensions, but not a sufficient one. This may be true of other elements as
well, e.g. societies with highly educated members tend to have better
environmental safeguards.

A2. Students may choose a variety of different weights, a selection of which are
discussed below (taking the UK as the home country):

Index 1: Equal weights

The UK ranks somewhere around the average. It lies below the Scandinavian
countries, which are widely perceived to be more socially oriented.

Index 2: High weights on income, education, health, and safety

The UK moves up slightly, but still lies below Finland, Sweden, and Norway.

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EXERCISE ANSWERS UNIT 13

Index 3: All weight on education

This is interesting, because the UK moves to the lower half of the index (below
the Russian Federation). Finland and Poland, countries that underwent major
educational reforms, moved to the top of the index.

Index 4: All weight on income

The UK stays around the average, moves slightly higher than in Index 2. Notice
how the US dominates the index. Most of the variables are ultimately dependent
on income, which is why the UK does not move much compared to Indices 1 and

2.

Marking guidance

A good answer will:

- Provide a justification for including or not including each of the
elements
- Discuss any possible relationships between the elements (e.g. without
sufficient income, high levels of education are rarely possible)

Teaching ideas

This is an excellent question to use as preparation for a lecture on how to

measure whether an economy is doing well or not. In the class, students might
be asked to compare the elements they included and their relative weights, and
get deeper into explaining their reasons with real-world examples e.g. from their
own countries.

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EXERCISE ANSWERS UNIT 13

EXERCISE 13.2 DEFINING RECESSIONS

A recession can be defined as a period when output is declining, or as a

period when the level of output is below normal, sometimes referred to
as its potential level. Look at this [article](tinyco.re/2305833), especially
Figures 5, 6, and 7, to find out more.

1. Consider a country that has been producing a lot of oil and suppose
that from one year to the next its oil wells run out. The country will be
poorer than previously. According to the two definitions above, is it in a
recession?
2. Does knowing whether a country is in recession make a difference to
policymakers whose job it is to manage the economy?

Introduction

The aim of this question is to get students to think about what a recession is as a
prelude to discussing these in more detail in U13 (and discussing policies to
address recessions in U14 and U15).

Answer

1. It would definitely be in a recession according to the first definition (declining

output). According to the second definition, it may not be in a recession. If there
is no oil in a country, the country has no potential of producing and selling the
oil, hence the potential level of GDP would decrease. Whether the country would
actually be in a recession depends on how much the actual level of GDP
decreased relative to the new potential level of GDP.

2. Yes. In a recession, the policymakers may adopt measures to stimulate

economic growth (e.g. lowering tax rates, subsidies, government investments,
lowering the policy rate), which would be inappropriate (e.g. potentially
destabilising) if the economy were not in a recession.

Marking guidance

A good answer will:

- Be able to use the two definitions given
- Give examples of how detecting a recession helps policy makers do
their job

Teaching ideas

The Great Recession is an excellent example to use to discuss this question. The
question itself is a straightforward use of the definitions, but in real life, some
events like the Great Recession are just as easy to detect, while other recessions
might be harder to spot. Examples from FRED for example, for recessions in the
1980s or the dot-com bust might be used to illustrate this point.

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EXERCISE ANSWERS UNIT 13

EXERCISE 13.3 OKUN’S LAW

1. Look at the regression lines (the lines of best fit) in Figure 13.5. What
prediction does the regression line show for unemployment when the
economy is not growing? Are the results the same for all the countries?
2. Assume that the population in the economy is growing. Can you use
this assumption to provide an explanation for your results in question 1?
What else might explain the differences between countries?

Introduction

This question tests understanding of Okun’s law and the ability to draw
deductions from scatterplots and regression lines.

Answer

1. In each economy apart from Japan the line of best fit predicts rising
unemployment when growth is zero. This result suggests that unless GDP is
growing, the unemployment rate will be rising. The prediction increase in
unemployment varies widely across the countries.
2. If the population is growing and if the participation rate is constant, then for
the unemployment rate to remain constant, employment must grow in line with
population. One explanation for the finding that unemployment increases when
growth is zero is that the population is growing in the economies in Figure 13.5.
Other possible explanations could relate to the functioning of labour markets in
different economies. In Spain, for example, temporary employment contracts
are important. This means that when growth slows, temporary workers are not
replaced and unemployment rises. The ease of laying off workers in the US is
also consistent with this. Germany and Japan are contrasting cases, where
workers tend to be retained during downturns in the economy to a greater
extent.

Marking Guidance

A good answer will:

• Show an understanding of Okun’s law

• Explain the relationship underlying the regressions

Teaching Ideas

In the class, the lecturer may want to delve a little deeper into the history and
economics of the countries shown in Figure 13.5 to figure out why the slopes are
different.A2. If the population is growing and if the participation rate is constant,
then for the unemployment rate to remain constant, employment must grow in
line with population. One explanation for the finding that unemployment
increases when growth is zero is that the population is growing in the economies
in Figure 13.5. Other possible explanations could relate to the functioning of
labour markets in different economies. In Spain, for example, temporary
employment contracts are important. This means that when growth slows,
temporary workers are not replaced and unemployment rises. The ease of laying
off workers in the US is also consistent with this. Germany and Japan are
contrasting cases, where workers tend to be retained during downturns in the
economy to a greater extent.

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EXERCISE ANSWERS UNIT 13

EXERCISE 13.4 HOW TO USE FRED

If you want real-time macroeconomic data on the German

unemployment rate or China's output growth, you do not need to learn
German and Chinese, or struggle to get to grips with national archives,
because FRED does it for you! FRED is a comprehensive up-to-date data
source maintained by the Federal Reserve Bank of St Louis in the US,
which is part of the US central banking system. It contains the main
macroeconomic statistics for almost all developed countries going back
to the 1960s. FRED also allows you to create your own graphs and export
data into a spreadsheet.

To learn how to use FRED to find macroeconomic data, follow these

steps:

• Visit the FRED website (http://tinyco.re/8136544).

• Use the search bar and type 'Gross Domestic Product' (GDP) and the
name of a major global economy. Select the annual series for both
nominal (current prices) and real (constant prices) GDP for this
country. Click the 'Add to Graph' button at the bottom of the page.

Use the graph you created to answer these questions:

1. What is the level of nominal GDP in your chosen country this year?
2. FRED tells you that the real GDP is chained in a specific year (this
means that it is evaluated in terms of constant prices for that year). Note
that the real GDP and the nominal GDP series cross at one point. Why
does this happen?

From the FRED graph, keep only the real GDP series. FRED shows
recessions in shaded areas for the US economy using the NBER
Note: To make sure you understand
definition, but not for other economies. For other economies, assume o
how these FRED graphs are created,
that a recession is defined by two consecutive quarters of negative you may want to extract the data into
growth. At the bottom of the graph page, select 'Create your own data a spreadsheet, and create a graph
showing the growth rate of real GDP
transformation' and click on 'Percent change from one year' (FRED gives and the evolution of the
you a hint about how to calculate a growth rate at the bottom of the unemployment rate since 1948 for
the US economy.
page: notes on growth rate calculation and recessions). The series now
shows the percentage change in real GDP.

3. How many recessions has your chosen economy undergone over the
years plotted in the chart?
4. What are the two biggest recessions in terms of length and
magnitude?

Now add to the graph the quarterly unemployment rate for your chosen
economy (click on 'Add data series' under the graph and search for
'Unemployment' and your chosen country name).

5. How does the unemployment rate react during the two main
recessions you have identified?
6. What was the level of the unemployment rate during the first and the
last quarter of negative growth for those two recessions?
7. What do you conclude about the link between recession and the
variation in unemployment?

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EXERCISE ANSWERS UNIT 13

Introduction

This question is an introduction to empirical work, using FRED, which is a fairly

user-friendly platform for developed country data.

Answer

Here we use the US as an example.

1. In 2014, the nominal GDP in the US was $17,348.1bn.

2. They cross in the year that real GDP is chained to (2009 in this case). 2009 is
the reference year for calculating all other data for the real GDP. Hence, for this
year, nominal and real GDP are equal.

3. The US economy has undergone 11 recessions since 1950.

A4. Since 1950, the two biggest recessions were Q3 1981 to Q41982 and Q12008
to Q32009.

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EXERCISE ANSWERS UNIT 13

5. The FRED database shows unemployment rising in both recessions.

6. Using the civilian unemployment rate from FRED it appears that the
unemployment rate rose from 7.3% to 10.4% in the 1981-82 recession and from
4. 8% to 9.1% in the 2008-09 recession. It is worth noting that in both cases the
unemployment rate continued to rise for approximately 3 months after the end
of the recession.

7. Unemployment follows Okun's law, i.e. increases during recessions and

decreases during booms.

Marking guidance

A good answer will:

• Download the data in Excel, and show using graphs how to answer each
question.
• Be able to comment on the connection to Okun’s empirical observations.

Teaching guidance

The first few part of this question could be assigned as preparation for the class
discussion of the last few, and also for the later FRED questions. It is a good idea
for students to download the data in Excel so they can get a feel for how the
graphs are produced, but for those unused to Excel, all of these questions can be
answered using manipulations on the FRED platform. In order to do so, once
they have located the data of interest as indicated in the instructions in the
question, they should click on the “Export” tab.

EXERCISE 13.5 HEALTH INSURANCE

1. Think about the health insurance system in your country. Is this an

example of co-insurance or self-insurance?
2. Can you think of other examples of both co-insurance and self-
insurance? In each case, consider what kinds of shocks are being insured
against and how the scheme is financed.

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EXERCISE ANSWERS UNIT 13

Introduction

This question is an opportunity for students to think about insurance (and

smoothing) as they may have encountered it in their own lives.

Answer

1. The insurance system in most developed countries is a combination of both

self-insurance and co-insurance. Most people save a portion of their income in
order to have funds available when they are too ill to work, and/or to meet
medical bills (self-insurance). At the same time, they pay taxes for health, social
and other types of insurance, and may, in some cases, take out a private
(commercial) insurance policy (both examples of co-insurance).

2. People save for retirement and to smooth consumption over time if their
income is likely to be volatile (self-insurance). At the same time, the government
provides a basic retirement income in exchange for taxes paid on income and
expenditure (co-insurance). They may also save against unforeseen shocks like
theft, fire, or personal accident (self-insurance) but these risks are more
commonly handled by buying a commercial insurance policy (co-insurance).
Helping out family members when bad luck strikes is co-insurance.

Marking guidance

A good answer will:

• Be able to recognize that health insurance typically involves self-insurance
as well as co-insurance
• Give examples of co- and self-insurance e.g. travel insurance, life insurance,
informal co-insurance via families, etc.

Teaching ideas

This question is a good one for any lecturer interested in teaching financial
literacy as many young people don’t have a clear idea about how insurance
schemes of various types (including pension schemes) work.

EXERCISE 13.6 CHANGES IN INCOME, CHANGES IN

CONSUMPTION

Consider a credit-constrained household type and a consumption

smoothing household type.

1. For each household type, use a figure with time on the horizontal
axis and income and consumption on the vertical axis to explain the
relationship between the change in income and the change in
consumption when income returns to normal after an unexpected
temporary decline.
2. Based on this analysis, explain the predicted relationship between
temporary changes in income and consumption for an economy with a
mixture of the two household types.

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EXERCISE ANSWERS UNIT 13

Introduction

The aim of this question is to strengthen students’ understanding of the model

developed in U10 and what it implies about the aggregate fluctuations
described in U13.

Answer

1. For the credit-constrained household, the return to the original budget

constraint would simply mean a change of endowment. Income and
consumption would increase until they return to their original level, both
increasing in proportion. (See Figure 13.11 below, where the blue line represents
the path of income and the orange line represents the path of consumption).
For the consumption-smoothing household, current consumption will have
fallen less than the fall in income and so the increase in consumption once
income returns to the original level will be smaller than the change in income.
(Compared with Figure 13.11 for credit-constrained households, the orange line
before ‘Actual income rises’ should be higher.)

2. In an economy with a mixture of constrained and unconstrained households,

a temporary fall in income would be followed by a fall in consumption of a lower
magnitude than would be the case if all households were credit-constrained.
The reason is that consumption-smoothing households would prefer to borrow
and consume now relatively more than the constrained households. This effect
would mitigate the impact of the temporary shock.
How much consumption would fall depends on the proportion of consumption
smoothing households in the economy and their preferences for consumption
smoothing.

Marking guidance

A good answer will:

• Explain why the fall in consumption (and subsequent rise) is proportional to
the fall in income for the credit-constrained households.
• Explain why the fall in consumption (and subsequent rise) is smaller than
the fall in income for the consumption-smoothing households.

Teaching ideas

It is a good idea to return to U10 to make sure that students understand what is
happening in Figure 13.12 and how it relates to the path of income and
consumption in Figure 13.11. Looking at some aggregate cross-country data on
income and consumption may also supplement the discussion of the second
part of the question.

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EXERCISE ANSWERS UNIT 13

EXERCISE 13.7 CONSULTING FRED

For your own country, use data from FRED to construct charts for the
growth rate of real GDP, consumption, investment, net exports, and
government expenditure.

1. How has government expenditure evolved in your own country

throughout the period for which data is available?
2. Comment on the relationship between the growth rate of output
and government spending during this period.
3. Describe the volatility of government spending and net exports
relative to that of GDP and suggest an explanation for the patterns you
observe.

Introduction

The aim of this question is give students a chance to further advance their
empirical skills and at the same time think about the relationship between
government (fiscal) policy, net exports, and output.

Answer

The following answers uses the example of Brazil as it is both a country whose
experience is not usually discussed in introductory texts, and because the data is
only available from the 1990s and so present a challenge. Students may want to
extend their work in such a case, and extract a longer time series from the
country’s own data sources.

1. From 1997, when the data is first available, public expenditure in Brazil fell
until 2000 and then rose quickly to 16% in 2002. Since then, it remained stable at
around a 12% level, and interestingly, did not vary much during the Great
Recession. Emerging economies were less affected by the Great Recession than
the OECD economies.

2. We would expect to see higher government spending during recessions, but

this trend is not clear in the data. There was a dramatic spending increase in
2000 during a relatively minor recession in Brazil.

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EXERCISE ANSWERS UNIT 13

3. There is quite significant volatility in net exports over the period. Net export
booms are typically correlated with a boom in the economy (reflected in GDP
growth). Brazil is a large exporter of iron ore, cars, soya beans, and other
agricultural products, and the period covered includes the period in which Brazil
has reduced trade barriers significantly while at the same time, growing quite
fast. Consumption smoothing clearly contributes to the fact that GDP growth is
so much smoother than net exports, whereas the volatility in government
spending is similar to that of GDP.

Marking guidance

A good answer will:

• Download the data and plot the graphs
• Compare the movements in the three data series
• Put forward an explanation for why GDP (which comprise net exports and
government spending, among other components) is smoother than its
components.

Teaching ideas

This question helps students to both acquire some data skills, as well as see for
themselves that the theory of consumption smoothing put forward in the unit is
showing up in the data. One idea is to answer the question for different
countries, see how different the relative volatility of GDP and net exports are,
and try to explain such differences. Are consumers in the more volatile country
likely to be more credit-constrained? Why?

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EXERCISE ANSWERS UNIT 13

EXERCISE 13.8 MEASURING INFLATION

After watching Richard Campbell’s animation (tinyco.re/4099871),

answer these questions:

1. How do we construct a giant representative shopping basket for the

whole population?
2. If inflation this year is 2.5%, then what is the current price of the
representative shopping basket that cost £100 last year?

The official national inflation rate does not necessarily reflect your own
personal inflation rate. If you want to calculate your own personal
inflation rate and how it deviates from the national one, some national
statistics agencies offer a personal inflation calculator, such as Statistics
Netherlands (tinyco.re/0093731) or Statistics South Africa
(tinyco.re/7543547). Your own office of national statistics may also have
a personal inflation calculator.

3. Using a personal inflation calculator, calculate your personal

inflation rate and comment on how and why it differs from the official
inflation rate for your country.

Introduction

This question aims to give students a hands-on way to think about inflation and
how it affects their lives.

Answer

1. The Office for National Statistics (ONS) collects data on prices in the basket.
Note that the basket includes goods purchased in a regular shop, but also
household bills, big-ticket purchases (cars, TVs, etc.), services (marriage
licences, etc.) and leisure activities. The basket is reviewed and updated
annually to reflect changes in the market and consumer spending habits.

2. £100 + (£100*2.5%) = £102.50, or

£100 * (1 + 2.5%) = £102.50, or
£100 * (1.025) = £102.50.

Note: The official national inflation rate does not necessarily reflect your own
personal inflation rate as your personal consumption patterns might differ quite
a bit from the representative pattern used to compute the official rate. The next
question asks about personal inflation rates.

3. The national inflation rate may differ from your personal inflation rate,
because there are deviations in consumer spending, which may be due to
different preferences and lifestyles e.g. some consumers may have extra
mortgage costs, while others have rent costs. Three examples are given below.

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EXERCISE ANSWERS UNIT 13

Student living in London on a very tight budget

The personal inflation rate, plotted below against the UK-wide one, shows more
stability than the national one, but after 2014, a higher level.

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EXERCISE ANSWERS UNIT 13

Student extravaganza in London

A graph similar to the one above now shows a persistently higher inflation rate.

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EXERCISE ANSWERS UNIT 13

Standard student budget in London

The personal inflation rate is now again persistently higher than the national
one after 2014.

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EXERCISE ANSWERS UNIT 13

Marking guidance

A good answer will:

• Provide a screenshot of their personal budget and the corresponding
inflation rate chart.
• Provide some explanation for why their inflation rate might be different
from the national one.

Teaching ideas

This question could be extended to a discussion about how the goods that enter
the computation of a country’s inflation rate are chosen (and how they should
change over time if at all).

EXERCISE 13.9 THE CPI AND THE GDP DEFLATOR

1. Use the data from FRED to construct charts for real GDP growth, the
unemployment rate, and the inflation rate for the US. Select the period
from 1960 until the most recent year available. In addition, download
the data for the US GDP deflator (search for GDPDEF).

Use the data you downloaded to answer the following questions

(remember that the CPI is calculated from the price of goods consumed
in the home country, while the GDP deflator is calculated from the price
of the goods produced in the home country):

2. The main difference in the evolution of the series for the CPI and the
GDP deflator takes place in 1974–75 and 1979–1982. What could explain
this pattern? (Hint: think about the likely impact of an oil crisis on the
price of imported goods and, in particular, on your own transport and
fuel bills.)
3. What do you notice about the evolution of unemployment and
inflation in the early 1980s?
4. Now construct the same charts for your own country. Write a brief
report on the evolution of inflation, unemployment, and the real GDP
growth rate over the same period.

Introduction

This is another data work question focusing on different measures of inflation

and how inflation is related to unemployment.

Answer

The first part of this question asks students to download the data on inflation, real
GDP growth, and unemployment, plot them, and use them to answer the rest of
the questions:

1. See graph below.

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EXERCISE ANSWERS UNIT 13

2. The figure below shows the evolution of the CPI and the GDP deflator. In 1973
and 1979-1980, there were large spikes in oil prices. The rise in oil prices fed
directly into higher prices for the household consumption bundle (particularly via
transport and heating costs). The GDP deflator does not include the price index
for imported goods such as oil. The GDP deflator also spikes in the years of the oil
shocks because of the importance of oil as an input for goods produced in the US
(such as manufacturing).

3. The figure below shows the evolution of the unemployment rate in the US. In
the data, we see a rise in the unemployment rate between 1979 and 1982, then a
steady fall until 1989. The fall in unemployment lags behind the fall in inflation.

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EXERCISE ANSWERS UNIT 13

4. Examples of three quite different countries are included below; students should
choose countries that they can get a sufficiently long time series of data on so that
there is something to discuss.

(*CPI inflation is not seasonally adjusted in the graphs below)

Austria: In the 1960s, Austria was rebuilding its economy after the Second World
War. We see that GDP growth is fairly high at around 5%. In the 1970s and 1980s,
Austria was hit by the oil price shocks. This is clearly visible in the massive
increase in the CPI and GDP deflator inflation rates. Unemployment reacted only
in the 1980s.

Between 1985 and 2007, Austria was experiencing a growth of around 3% and
inflation of around 2%. Unemployment kept rising in the 1980s, but remained
stable (around 7%) until the financial crisis in 2007.
Austria was hardly hit by the financial crisis, particularly in 2009 (GDP growth = -
3.65). However, unemployment only started increasing above 7% in 2012.

Brazil: Unfortunately, data for Brazil is only available for a relatively short time
period.
We can see that Brazil was hit hard by the oil crisis in the 1980s, with extremely
high CPI inflation rates. In fact, Brazil is tackling high inflation to this day.
Since the 1990s, Brazil was one of the fastest growing economies in the world.
We can see a steady decline in unemployment and since the 2000s, stable
inflation and GDP growth rates above 2%.

South Africa: South Africa is one of the most developed countries in Africa, yet
we see that it is struggling with very high unemployment rates.

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EXERCISE ANSWERS UNIT 13

The oil price shocks in the 1970s and 1980s had an impact on South Africa. The
effects are more pronounced in the GDP deflator than the CPI. This is probably
because the mining export-oriented industry, largely dependent on oil, has been
the main driving force of South Africa´s economy. (May have been price controls
on petrol – I don’t know but should check.)
South Africa underwent a major political and therefore economic upheaval with
the end of apartheid in the 1990s, and was affected by the latest financial crisis.

Marking guidance

A good answer will:

• Be able to plot the relevant graphs and describe the observed trends. It is
important not to reward speculation about causality. In later units,
students will learn models to help them interpret such data but any
attempts at explanation at this stage are likely to off-target.

Teaching ideas

Lecturers might ask students to revisit this question after covering U14–U17 so
that they can reflect on the trends in the data after having learnt some recent
economic history and the theoretical framework underlying the relationship
between the business cycle, inflation and unemployment, and the role of
monetary and fiscal policy in stabilization.

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