NORTH SOUTH

UNIVERSITY

ECO - 104
Introduction to Macroeconomics

Submitted To:
Nazneen Imam
Lecturer
Marketing and International Business
School of Business & Economics (SBE)

Answer to the Question number- 1

(a)

Year 2017 2018 2019 2020

GDP growth rate 7.3% 7.9% 8.2% 5.2%
From the above diagram, it clearly understandable that the GDP growth of Bangladesh was
upward trending till 2019 but took a sharp downward dive in 2020 due to Covid-19.

In order to analyze GDP growth rate, I prefer to use real GDP rather than nominal GDP. Nominal
GDP is calculated by summing up the prices of all the goods times the quantity of the goods
produced. In other words, Nominal GDP = ∑PQ. It is very important to understand that if any
one of the two variables or both, price or quantity increases then GDP will rise. So, in an
economy the quantity of goods produced can be constant and if price increases then GDP will
have increased. So, nominal GDP can provide false impression of the GDP growth rate. On the
other hand, real GDP takes a base year price which is constant and then multiplies the quantity
of goods produced. Thus, an increase in real GDP means that the economy has actually grown
and that is why this method is preferrable to me (Arnold, 2019, pp.145-159).

Economic growth means the increased productive capabilities of the economy which is
expressed by an outward shift of the Production Possibility Frontier (PPF) curve or a rightward
shift in the Long Run Aggregate Supply (LRAS) curve. The LRAS curve shows the natural real GDP
or the quantity produced at the natural rate of unemployment. So, whenever it shifts rightward
it means that the economy is now capable of producing more output and hence economic
growth has been achieved (Arnold, 2019, p.47).

From the above data, it is clear that the economy of Bangladesh has been growing for a while
There are certain factors of this growth rate in Bangladesh which have been discussed below:

1. Technology – Bangladesh has rapidly developed in understanding and implementing various

technological features in the relevant sectors such as agriculture, industries etc. This in turn has
increased the capacity to produce more goods which leads to economic growth.

2. New Resources – It is no secret that our country is filled with natural resources and recently
we have acquired some new gas fields and naval area. These resources will be key inputs that
can be used to produce more goods.
3. Improved education and training – Skilled manpower is extremely important to efficiently
produce goods which will decrease wastage and ensure optimal production. Our country has no
shortage of labor which can be turned into skilled manpower with proper training.

4. Investment of capital – The injection of capital in an industry to boost its capabilities can also
lead to greater production outputs. The government has already done this with the ready-made
garments industry.

5. Population Boom – An increase in population is very likely to shift the PPF curve outward. The
reason is that the more population that a country has the more will be the labor force and
hence more production possibility. The population of Bangladesh has been upward trending in
the last few decades so this is a relevant factor as well.
 Answer to the Question number- 2

(a)

Impact on GDP growth rate:

Year 2018 2019 2020

GDP growth rate 7.9% 8.2% 5.2%

The GDP growth rate of Bangladesh in 2018 and 2019 was 7.9% and 8.2% respectively.
However, in the COVID-19 stricken year of 2020 the GDP growth rate was slumped to 5.2%.
Thus, it absolutely clear that the pandemic had an inverse effect on GDP growth rate
(Bangladesh GDP Growth Rate | 1994-2019 Data | 2020-2021 Forecast | Historical | Chart, 2021)

Impact on CPI(Inflation):

Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Inflatio
n 5.57 5.46 5.48 5.96 5.35 6.02 5.53 5.68 5.97 6.44 5.52%
Rate % % % % % % % % % %

It is very interesting to note that the inflation rate at the beginning of 2020 was 5.57% whereas
it actually decreased to 5.52% in November. COVID-19 began in this country around march and
from then on it went up and down finally peaking in October to 6.44%. However, it came down
the following month (Inflation, 2021).

Impact on Unemployment:

Year 2018 2019 2020

Unemployment rate 4.28% 4.19% 4.15%

It is very important to note that initially because of the sudden shock of pandemic a lot of
workers went out of work but at the same time opportunities such as work from home has
dramatically increased. The cyclical unemployment has increased as people with transferrable
job skills are constantly changing jobs to make ends meet. The production of various health
products such as sanitizers and masks went up which requires a lot of extra workers. Moreover,
a lot of people like the housewives started their own small businesses from the comfort of their
homes. In the second quarter of 2020 the unemployment rate spiked but as things began to
normalize the rate gradually went down (Bangladesh Unemployment Rate 1991-2021, 2021)
 (b)
If there is a recessionary situation, then a classical economist will always opt for the policy of
noninterference or laissez-faire. Classical economist believe that the economy has the power of
self-healing and thus in the long run it will regulate itself to natural employment level. They
believe that the recession is temporary and in time, without any interference the equilibrium
will shift to the LRAS curve and produce the natural real GDP (Arnold, 2019, p.208)

On the other hand, a Keynesian economist believes that if the economy is in recession for a
long time then there is a possibility that the equilibrium point is in the recessionary gap. They
have an assumption that the total spending in the economy is the summation of household
consumption, business investment and government purchases and that the private sector
cannot regulate the economy to natural real GDP. Thus, in order to shift the AD curve to
produce at the natural real GDP government intervention and spending is necessary and
recommended (Arnold, 2019, pp.233-234)

In minor recession, the economy takes a sharp dive then recovers within a short period then
drops again before finally recovering. However, in the case of severe recession the economy
does not show any sign of recovery for a long time which is then termed as depression
(“Recession shapes,” 2021.)

In case of severe recession or depression Keynesian policies are more efficient. During the great
depression throughout the entire decade of 1930 and the great recession of 2008 we can see
the effects of Keynesian policies. In both these cases, the economy was stuck in recessionary
gap for so long that it become the equilibrium point. In both these cases there was huge
involvement of the government as indicated by the massive government spending’s. In 2008
recession the US government actually passed a recovery ACT to stimulate the economy along
with tax cuts of 787 billion dollars (Macroeconomic Policies during the Recession of 2008-2009,
2021).
 (c)
Due to COVID-19, the economy of Bangladesh has been severely damaged as indicated by a
decline of GDP growth rate to 5.2%. However, the economy of our country has not gone into
recession. It has gone through a contraction during the third quarter of 2020 but because of
prompt government intervention the economy has been on the rise ever since. The Bangladeshi
government has announced a financial stimulus package of Tk 1,20,953 crore to boost the
economy. Along with this low interest credit facilities were declared to revive various economic
activities. The formation of security nets to help the poor and the careful increase of money
supply are relevant as well (Finance Division,2020)

I believe that the Keynesian expansionary fiscal policy that is an increase in government
spending and lower tax rate could have made a better recovery for Bangladesh. The increase in
government expenditure will directly shift the AD curve rightward and lower tax rate will
encourage both investment and consumption. This will directly result in the AD curve shifting
right which means the real GDP will increase. It is very interesting to note that the Bangladeshi
government has increased their spending and has announced a financial stimulus package of Tk
1,20,953 crore but there have been no sufficient tax cuts. Tax cuts in the third and fourth
quarter would have encouraged more investment by business and less saving by the
households. This in turn will help the economy to grow faster.
 References

Arnold, R. A. (2019). Economics. Australia: Cengage Learning.

Bb.org.bd. 2021. Inflation. [online] Available at:

<https://www.bb.org.bd/econdata/inflation.php> [Accessed 14 January 2021].

Finance Division, Ministry of Finance. (n.d.). Retrieved from

https://mof.portal.gov.bd/site/page/28ba57f5-59ff-4426-970a-bf014242179e/Bangladesh-
Economic-Review-2020

En.wikipedia.org. 2021. Recession Shapes. [online] Available at:

<https://en.wikipedia.org/wiki/Recession_shapes> [Accessed 15 January 2021].

Macrotrends.net. 2021. Bangladesh Unemployment Rate 1991-2021. [online] Available at:

<https://www.macrotrends.net/countries/BGD/bangladesh/unemployment-rate> [Accessed
15 January 2021].

Tradingeconomics.com. 2021. Bangladesh GDP Growth Rate | 1994-2019 Data | 2020-2021

Forecast | Historical | Chart. [online] Available at:
<https://tradingeconomics.com/bangladesh/gdp-growth> [Accessed 15 January 2021].

UKEssays.com. 2021. Macroeconomic Policies During The Recession Of 2008-2009. [online]

Available at: <https://www.ukessays.com/essays/economics/macroeconomic-policies-
recession-2693.php> [Accessed 15 January 2021].