ECO 509– Business Conditions Analysis
Essay Assignment 1
Dr. Michael S. Miller
Directions: Answer both questions. They are worth 25 points each. Length per question: around 1.5 to 2.5 pages double-spaced would be fine. Longer answers are acceptable as long as the extra length is used to make valid and important points in answering the questions.
1. For this task on the economic way of thinking and economic indicators I have chosen data from the Kingdom of Bahrain on employment, wages, real GDP and inflation. I am going to ask you a series of questions that you will answer using these data and some of the essentials of the economic way of thinking.
Indicator 2020Q1 2020Q4 2021Q1
Total Employment 743,620 687,700 685,204
Bahraini Employment 156,746 152,678 153757
Non-Bahraini Employment 586,874 535,022 531,447
Monthly Wage, Public Sector BD702 BD705 BD714
Monthly Wage, Private Sector BD441 BD447 BD455
Real GDP in billions of BDs BD3.151 BD3.086 BD3.064
The inflation rate in Bahrain between 2020Q1 and 2021Q1 (year-over-year) was -2.7%; obviously prices in general fell.
Here are the questions I want you to answer.
a) When we look at economic data we do so to elicit signals. First, I want you to define what we in this course call a “direct signal” and what we call and “indirect signal”. Once done take a look at the level of total employment and tell me, for that row, how many direct signals are there? List them and briefly explain why they are direct signals.
b) Let’s consider using these same employment figures to draw inferences about real GDP, i.e., an indirect signal. Assume that you have only these total employment figures. Might you be able to draw an inference about what happened to RGDP over the same period based on these labor numbers, (i.e., what is the story that would allow you to infer?)? Why or why not? If so, what would be your guess as to the direction of change in RGDP over the period? Do the data on RGDP concur with your inference?
c) Now take a look at employment during the pandemic on a year-over-year basis. Which sector took the biggest hit in absolute and percentage terms over this period? Provide the figures. Does this outcome surprise you or is it what one would expect, given the nature of the Bahraini workforce? Explain.
d) Note the difference between the wages in the public (i.e., government) and private sectors and the nationality of those who dominate those sectors. Does this wage gap surprise you? Whether it does or does not, what economic and/or social factors might explain this 60% difference in wage levels?
e) Now let’s consider the issue of real versus nominal. Take a look at the wages of the two sectors. Did they rise or fall in nominal terms year-over-year (2020Q1 to 2021Q1) and if so by how much, by sector? However, what really matters in economics are real values. What were the changes in real wages earned by the two sectors? Explain how you came to this conclusion.
f) In part c you will note that the public wage is much greater than the private but the percent changes in wages in real terms were not identical. Speculate on why the wages of the private sector rose more than public in this particular period.
2. In the initial lecture on the economic way of thinking we considered the description of cost-benefit analysis in macroeconomics offered by Henry Hazlitt. For this essay I want you to use Hazlitt’s lesson to help me analyze a proposal by the U.S. president. The policy is this: the president proposed that the U.S. government forgive student loans taken out by college students ($10,000 to $20,000 per student who borrowed) at a total cost to the government of roughly $400 billion. The money would essentially come from all taxpayers in the country. Here is what I want you to do: First, please describe/explain in your own words Hazlitt’s lesson. Second, any such analysis, to be valid, should be done by an analyst who is considered “disinterested”. Explain to me why disinterestedness is important how an analysis could be tainted if the analyst is not. And third, explain how you would use Hazlitt’s lesson to structure an analysis of the proposal. For example, what would be the questions you would have to ask and answer about the policy to do a reasonable evaluation of the policy? Would they be questions on who, when, why, etc.? You may also draw upon any other relevant ideas contained in the economic way of thinking to explain how someone should approach the analysis of this policy. (1.5 to 2 pages, double-spaced, for this question)