Introductory Macroeconomics, ECON10003

Semester 2, 2020
Assignment 1

This is a group assignment. You may work in groups of up to three people. Although students may
choose to work and submit their assignments on their own (in which case you will need to create
‘a group’ with only one person in it). All group members must come from the same tutorial. The
assignment is due by 4pm on the 11 September.

The submission process will have two steps. The first step is for group registration and the second
step is for submission of the assignment. The group registration link will be available from the
main menu of the Canvas and students must register in a group by 4pm on Friday, 4 September.
If you choose to do the assignment on your own you will still have to register as a group of one,
without registering you will not be able to submit the assignment. Finally the submission link will
be available from Wednesday, 9 September until the due date. Submit your assignment electron-
ically using the Turnitin application accessible via the LMS under the “Assessments” tab. Late
assignments will not be accepted, please apply for Special Consideration if for some documented
reason you cannot submit by the due deadline.

Grading criteria: The tutors will grade the assignment according to the following criteria:

• Ability to use material discussed in lectures, tutorials, and in the textbook to answer the
assignment questions in a logical and coherent fashion (90 per cent weight).
• Overall presentation of the assignment. This includes spelling, grammar, correct construction
of diagrams, etc. (10 per cent weight).
• The maximum assignment length is 1000 words.
• Please note that the University and the teaching staff take academic integrity seriously. Please
be aware that plagiarism and collusion are unacceptable. Further details can be found in the
subject guide.

1. Cross-country Saving Rates

This question examines cross-country differences in saving rates. Please examine Figure 1, which
displays the gross domestic savings as a percentage of GDP for Australia and China. The data
shows that China saves a significantly larger proportion of income than Australia. The rest of the
question examines potential reasons for these differences.

a) Suppose an economist was interested in comparing the saving behaviour in China to Aus-
tralia. Explain why it is reasonable to divide by domestic savings by GDP when making this
comparison. (1 mark)

b) If we look at the age structure, both China and Australia have a similar median age. However,
Australia has a slightly larger proportion of citizens over the age of 65. With reference to
the lifecycle motive for saving, explain what impact you would expect this difference in age
structure to have upon saving rates. (2 marks)

1
 50
40
Saving Rates

30
20
10

China
Australia
0

1960 1970 1980 1990 2000 2010 2020

Year

Figure 1: Gross Saving Rates - Australia and China

c) One potential reason for the difference in saving rates across countries is related to differences in
social security or welfare systems. Some economists argue that China offers smaller pensions
and less unemployment insurance than economies like Australia. Explain how this would
impact saving decisions in China. (2 marks)

2. Covid-19 and the Labour Market

a) Covid-19 has had a large impact upon the economy. The possibility of being exposed to a
potentially deadly virus has reduced demand for many goods and services that involve some
sort of social interaction. Examples for would include restaurant meals, haircuts, and theatre
performances. Explain what effect this decline in demand for goods, would have in a perfectly
competitive model of the labour market. (2 marks)

c) Now suppose wages are fixed. That is, they do not adjust to changes in labour supply and
labour demand. This could arise due to, for example, contractual arrangements between
employers and workers. For simplicity, further assume that the economy originally starts in
a situation where the wage equates labour supply and labour demand. Now re-examine the
effect of the Covid-19 pandemic on the labour market assuming wages are fixed. Describe
any differences between an economy in which wages are able to adjust and an economy in
which wages are fixed. (3 marks)