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Aggregate Demand and Supply : Inflation in Venezuela Compared to Norway

Assessment 3: Macroeconomics Group Report Guide

Overview

  • Due: Monday October 29th, 2018 3:00 pm (written portion) + presentation in your workshop
  • 35% of final grade
  • This is a group report
  • Group members: form a group of 4
  • Word limit: 3000 words
  • Select 2 research papers
  • Should cover 2 different countries
  • Must be published in peer-reviewed refereed academic journals
  • Topic: should be based in the macroeconomic content covered in class
    • GDP
    • Unemployment
    • Inflation
    • AD and AS model
    • Monetary Policy
    • Fiscal Policy
    • International Economics: (exchange rates)

Your sources must be academic

  • The articles have to be published in academic journals only. Check the library if you need help or ask your workshop leader if you are unsure. Also try the database EconLit.

Your sources should be recent

  • aim for publication dates not older than 2000
  • both articles should focus on similar time periods (i.e. do not compare Japan in 1980 and the US in 2007)

The report should have a global perspective

  • Your research articles should be based on two different countries:so you can compare and contrast, for example, monetary policy in Australia and Canada, or Japan and France
  • Be sure to choose articles presenting similar issues to enable comparison. For example, if you compare government policies to reduce unemployment in Sweden and in the US you need two articles dealing with unemployment policies.

Report Structure

  1. Short introduction
  2. Critical review of first article
  3. Critical review of second article
  4. Comparative analysis of both articles, application of theory
  5. Conclusions and recommendations
  6. References

Answer

Aggregate demand and supply 

The macroeconomic indicators of the selected countries present a pure contrasting feature in recent years. While Venezuela has seen declining aggregate demand in recent years and GDP has reduced significantly along with higher inflation the same for the economy of Norway has been quite contrasting. Post 2014, when Venezuelan economy hugely suffered from the eventual cooling of oil prices and which affected the Venezuelan economy as government revenue declined b over 80% and other sectoral growth in the economy was grossly inadequate to compensate  for the reduction in hydrocarbon economy. The same was quite different for the Norwegian economy since the Norway economy was much more balanced with oil revenue accounting for a little over 20% of the entire GDP and 30% of government revenue. Thus, as a result of the oil price the Norway economy was much better placed to grow and balance the way consumption demand was created. The same was not the case with Venezuela. Oil revenue accounted for more than 95% of the country’s Exports and there was pretty higher current account deficit and the country administration were complete failures as far as building foreign exchange reserves were concerned. 

While the prices were on the higher side before 2014, the same acted as a boon for the economy of the Venezuelan economy. In 2015 the oil prices hovered between $100 to $125 per barrel and the government of Venezuela spent lots of budgeted amounts on creating infrastructure and employment. However as the oil went of the boil after 2014, Venezuelan government found it impossible to spend too much on the economy and reserves were emptied in two years leading to spiraling debts and higher inflation. Approximately 45% of the government revenue came from oil exports and as a result of which a slight dip in the oil prices made the government spending highly susceptible. As a result of which the overall demand for various goods and services in the Venezuelan economy declined radically. Significant loss of revenue by the government made it impossible for the government to spend money on the modernization of oil sector and which resulted in reduction in capacity and reduced export capacity further (VERA, 2015)

Venezuela also encountered a highly volatile oil production management in recent times. The government company which was in charge of oil production (PDVSA) failed to account for regular production estimates and ignored modernization programs. Financial results and productivity is unknown through it is expected that efficiency in production was highly irregular and lower than other countries like Norway. As a result of which the production costs rose more making it impossible for outside companies to invest in Venezuela. 

As aggregate demand and aggregate supply in the economy (shown by GDP) is dipping by the year and supply too becoming erratic the country has become entirely dependent upon exports for most goods and essential commodities. The dip in the Venezuelan GDP or AD is being shown as follows :

Venezuelan GDP

Source: https://www.statista.com/statistics/370937/gross-domestic-product-gdp-in-venezuela/

The aggregate demand and supply function of the economy is demonstrated as follows:

       Aggregate Demand and Supply Function

While the AD-AS interaction in 2012 was higher in 2012 , the same came crashing down in 2013 thereby increasing the price level and inflation significantly in Venezuela. 

However, the problem is manifold as inflation in the Venezuelan economy has recently rise as afar as 10000%. As a result of which the Venezuelan currency is highly depreciated and smaller denomination notes have become useless. The problem of the economy is so severe that even if the oil prices recover to $125 in the near term the economy simply does not have the personnel and the technology to increase production in the next 5-8 years and would continue to face hyperinflation and shortage of investment (collander, 2010)

In contrast to the perilous economy of Venezuela, the economy of Norway is much more balanced and well oiled. However, the government sector is not entirely unaffected as the oil revenue contribution to government revenue has dropped from 33% margin in 2012 to 20% by 2017. As oil prices remained lower in the last 4 -5 years the same is expected to impact the Norway government budget (Besanko, 2012). The growth of the Norwegian GDP or AD/AS is being shown as follows:

 Norwegian GDP

Source: world bank 

As can be seen the Norway GDP is already gathering steam and showing an upward trend  since the first quarter of 2017. Expected growth rates for the AD/AS is likely to be 1.6% for 2018 and 2% approx. for the next 4-5 years. 

The aggregate demand and supply function of  the economy is demonstrated as follows:

                    

demand and supply function of the economy

                                                             

While the AD-AS interaction in 2012 was lower the, the same came increased in 2013 thereby decreasing the price level and inflation significantly in in Norway. However after that AD-AS declined and price level and inflation both increased slightly. 

The Norway governments oil revenue is invested in the Sovereign wealth fund and the government would withdraw dividend from the fund for meeting budgetary shortfalls. The fund at the end of 2015 stood at $838 billion. This fund is expected to decline in value and return as markets worldwide would feel the recessionary pressure. However, Norway is much better prepared to face any immediate downturn as Government revenue won’t reduce substantially like Venezuela. Inflation is managed well by the Norway central bank and the same has remained lower approximately 1.8% in 2017 and slightly higher in 2018. Norway GDP was able to grow in the period between 2014-2015   at approx. 1.8%. hence the aggregate demand and supply both rose in between 2014-2018 as opposed to severe decline recorded by the economy of Venezuela. 

As a result of dip in government economy Venezuela’s rate of unemployment is at an historical high and millions of people migrated to other south American nations as the currency was highly depreciated and became valueless on the back of 10000% inflation. In Norway however, the rate of unemployment was recorded at 3.5% in 2012 and 4% approx. in between 2014-2018. Thus, it can be said that the diversification of the Norwegian economy and better management of the economy made it possible for the Norwegian economy to remain robust in the face of oil price decline that a disintegrating Venezuelan economy (Toshniwal & Gupta, 2017)

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