Practise using AD/AS diagrams, components and shifts to analyse output, price levels, growth and inflation pressures.
What is a correct description of an aggregate demand (AD) curve?
It is a curve obtained by adding the market demand curves of all consumer goods traded in an economy.
It is a curve determined by the horizontal summation of all individual consumer demand curves for a product.
It is a curve that shows the total amount of goods and services firms are willing to buy at a given price in an economy.
It is a curve that shows the total demand of all goods and services produced at all price levels in an economy.
Fall in price of oil but Colombia can look forward to growth
Fig. 1: Colombia's growth and the oil price
Source: Thomson Reuters Datastream
Fig. 2: Colombian peso against the US dollar (peso per US\$), inverted scale
Over the past year, the halving of crude oil prices has hit Colombia and much of South America hard. Venezuela's economy, for example, is expected to shrink by this year. Colombia's national oil production was running at 1 million barrels a year, accounting for half of its exports and a fifth of government revenues. In Puerto Gaitan, which only a year ago was the centre of Colombia's oil industry, the town's population had tripled to 45000 in just a few years. Property prices had soared and hotels overflowed. Today, though, business profits have fallen, leading to a fall in spending by entrepreneurs. "For Sale" signs now hang over Puerto Gaitan's closed stores, car parks in shopping malls are empty and 10000 people have left the town. Towns throughout Colombia are experiencing similar problems.
Colombia's government is feeling the effects as well. Every US$1 drop in the oil price per barrel cuts an estimated US million from government revenues. As a result, the government has cut spending and raised taxes to keep its budget deficit down. More worryingly, the collapse in the price of oil has opened a large current account deficit equivalent to of national income. Yet not all is bleak. Colombia's economy is forecast to grow this year. And unlike in neighbouring Venezuela, where oil accounts for more than of exports, there is concern but no panic.
Firstly, the peso's depreciation could reverse Colombia's current account problems, boosting traditional exports such as coffee, textiles, car parts and flowers - if not to its immediate neighbours, then to the United States. Colombia produces oil, but it is not only an oil-producing country. Secondly, Colombia's government is having peace talks with Marxist rebels to end the country's five decades of unrest. The government's military expenditure will be reduced and estimates suggest that this 'peace dividend' could add as much as 2 percentage points to growth.
Use the information to explain how each of the components of aggregate demand in Colombia has been affected by the fall in the price of oil.
Malaysia's uncertain economic prospects
Malaysia is an emerging middle-income country. Its increasing population is an important factor in promoting future economic growth. The country, however, faces two underlying problems. First, the fertility rate, the average number of children a woman can expect to give birth to, has fallen consistently as Malaysia's economy has developed. This rate is now below the critical level where a population replaces itself. Second, Malaysia has an ageing population, with an increasing proportion of its population over 65 years of age. In 2015 the average age of Malaysia's population was 28.2 years; in 2030 it is forecast to reach 34.1 years. Malaysia's forecast total population to 2027 and its ageing population from 2017 to 2022 are shown in Figs. 1.1 and 1.2 below.
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Fig. 1.1 Total population of Malaysia, 2017 to 2027
The key issue for Malaysia's government is whether it is prepared for this fundamental shift in its population. There is plenty of scope for optimism. The economy appears to have recovered from the shock of the COVID-19 pandemic. Its growth rate in 2021 and the 2022 forecast was above the government's target of , with substantial growth in exports of electrical and electronic goods, palm oil, gas and oil supplies. Unemployment is below 4\% and the current account of the balance of payments was projected to have a record surplus in 2022.
Economists, however, fear that Malaysia's government and its people are not ready to meet the challenges of an ageing population. In a recent survey, of respondents felt it was the duty of the young to take care of the elderly, but they were also concerned that the economy could not cope with the pressure on its human capital and other resources. More resources will have to be allocated to meet the needs of the elderly.
It was further argued that Malaysia needed a proper plan for dealing with this situation. According to one economist, free childcare for working parents was essential and tax incentives should be used to keep more elderly workers in employment.
Excluding net exports, assess the likely impact of the change in Malaysia's total population on aggregate demand.