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Economics: The Food Crisis Add in library

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Questions:

1. From: 2007: recently, droughts, poor harvest conditions, and growing demand from fast growing countries in the developing world have sent world food prices skyrocketing.

a. Would you analyze this as a demand shock or a supply shock, and why? is this likely to change the natural rate of unemployment(NRU)? explain the natural rate and why the shock likely will or won't change NRU.( no labor market graph required)

b. Demonstrate the effect of escalating food prices on an AS-AD graph, starting with MR equilibrium. show the SR solution, and explain WHY prices and GDP move in the direction you select.

c. Show the MR solution, and explain why prices and GDP move in  the direction you select.

d. Now suppose that labor productivity rises significantly at the same time that food prices start escalating. explain how this would alter your analysis and graph, but you need not graph it.

3. Explain why the AS slope is usually perceived to be positive(i.e, explain how AS represents possible labor market equilibria). Does this help you explain what circumstances could flatten out the AS curve?(consult the AS equation below). Why does this matter?

4. (a) Graph and explain monetary neutrality in the medium run.

(b) Why does Blanchard introduce monetary expansion when the economy is already operating at the natural level of Y? explain the controversy over the natural rate of unemployment, relying on Blanchard's discussion and on the Bernstein& Baker article.
 
 

Answer:

1. A. The food crisis was due to supply shock because the quantity of supply reduced and price increased. The major factors for food crisis during 2007-2008 that leads to supply shock are:

• Droughts in wheat producing countries during 2005-06.
• Reserves of gain were low.
• 5% of the world cereals were converted into agro fuels.
• Per capita consumption of meat was doubled in some developing countries.
• Uncontrolled growth of world population.
• Productivity and soil losses due to urbanization, soil erosion and water depletion.
• Low production of crop due to natural disaster.
• Increase in demand for the resource intensive food.
• Rise in the price of oil.
 

Supply shock can change the natural rate of unemployment. The natural rate of unemployment is the unemployment rate when the market of labour is in equilibrium. It is caused by the supply side factors rather than the demand side factors. Price rise of oil in supply shock can lead to high inflation and high unemployment (bruegel, 2011). It is the difference between those who want job at current wage rate and one who are able and willing to take job.

B.

The effect of escalating food prices on AS-Ad graph starting with MR equilibrium is given below. The rise in the price of food leads to decrease in the demand and supply. 

The rise in the price of food leads to supply shock. The short run aggregate supply moves to the left direction.  The new higher price level lowers the real GDP shifts to the left (Cohen and Clapp, 2009).

C. Increase in the price of food decrease the demand and quantity output moves towards left direction and supply of food decreases. The market can be in an equilibrium state if the supply is according to the demand.

D. Increase in the labour productivity and escalating price rise impose vital impact on food insecure and poor people. Rise in the price of goods and commodity leads to the consumption only by rich people. The factors involves change in the opportunity cost of production and food consumption  in terms of substitution and real income affecting the cost and consumer, income and substitution effect effects for producer (Gliessman, 2013). Increase in the productivity which means more workers able to produce more output. Rise in the price of food can be controlled by high production of food from the labours employing in the process.

3. As slope is perceived to be positive because:

  • Inflexible prices of resources that makes easier to reduce the resource employment and aggregate real production when the level of price falls.

  • The pool of the natural unemployment consists of structural and frictional unemployment that can be used to increase the real production when level of price rises.

  • Imbalance purchasing power of the resource prices entices the resource owner to produce less or more aggregate real production.

The supply curve provides the total number of employees in the economy allocated in the market at the given wage level. Equilibrium occurs when the demand equals supply generating competitive employment and wage. The wage level would create either downward or upward pressure on the wages, there would be too many workers competing for few job available or too many job chasing few worker available (Healey, 2011).   The labour market will be in equilibrium when demand is equal to supply E and workers are employed at wage of W. The entire person gets the job at the wage in the equilibrium state. Producer surplus is P and worker surplus is Q in the triangle. The market competition maximizes the gain from the trade that is P+Q.  

Neutrality of money is based on the idea that change in the supply of money would not change the aggregate demand and supply of the goods, services or technology. The growth rate of money influences in the medium runt that is inflation. In medium run the economy will return to natural rate of unemployment and natural level of output (bruegel, 2011).  The natural level of output is determined by supply condition in economy, if the economy is growing over time then the there will be output growth. The growth of population stays constant and economy return to the natural rate of unemployment.

The Blanchard introduced monetary expansion which includes AS and AD model which explains the joint equilibrium on three markets for financial asset, gods and for the labour can expressed as intersection point for the two curves. In financial and good market, price high have the same effect as lower money supply and real money experience, downward sloping curve called aggregate demand. In the labour market, high output means low unemployment, which benefits the worker bargaining power, rise in wages and price leads to aggregate supply curve. The monetary expansion of Blanchard clearly states the aggregate demand and supply of the economy.  

The controversy over the natural rate of unemployment the Blanchard's use the term full employment means everyone have job at any given moment. Structural and frictional unemployment is natural part of the economy. Bernstein & Baker article structural and friction unemployment result from the lack of job. Natural unemployment is considered as the full employment (Cohen and Clapp, 2009).

 

References

bruegel, m. (2011). From the Crisis of Food to Food in Crisis. Gastronomica: The Journal of Food and Culture, 11(3), pp.40-52.

Cohen, M. and Clapp, J. (2009). The global food crisis. [Waterloo, Ont.]: Wilfrid Laurier University Press.

Gliessman, S. (2013). A Food Crisis Spawns an Alternative Food Movement. Agroecology and Sustainable Food Systems, 38(1), pp.1-2.

Healey, J. (2011). Global food crisis. Thirroul, N.S.W.: Spinney Press.

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