COURSE: BUSINESS ECONOMICS

PROJECT: COVID-19: The Global Shutdown

Instructions for the submission:
● Please maintain the following: Font - Times New Roman, Font Size - 12, Line Spacing -
1.5

Name JAGRUTI Z. ROHIT

Question 1

PART A: A surplus in April of 2020 led OPEC countries to decrease oil production, and cut
production instead of offloading the surplus in order to maintain price levels before a sharp
sell-off. The decrease particularly in air travel caused the dramatic decision to limit
production.
OPEC countries strategy was to reduce supply of oil to support price recovery now focusses
aggressively not only on stock but also on the shape of all the oil curves and the nature of an
approach supporting the short-term market.
With the spread of the COVID-19 epidemic, growth, travel, and trade stagnated, and the price
of oil decreases. So, it explains the interest conflict of debt producers with different budget
requirements, fiscal deficits, and market expectations, this substantiates previous findings in
the literature.
There has been some disagreement concerning Saudi Arabia hopes to keep oil prices high, and
Russia seeks to achieve a share of world oil markets and their impact on prices. Moreover,
later spending in China and Europe, once the epidemic is under control, will ultimately
promote economic recovery, since the effect of better monetary policy and targeted fiscal
responses from governments will lead to recovery. As such, oil prices are likely to reach new
lower levels, but a medium-term recovery is in sight.
We have found that investors changed their investment strategy as oil spot prices reported a
first decline that contributed to high volatility in the future commodity market during the first
cycle of coronavirus spread. Our results are consistent with a theory of future expectations on
the market, which shows that speculators can predict future price patterns as economic agents.
This result not anticipated, the reason for this is probably, after the Covid-19 pandemic, the
widening gap between oil demand and supply in the US, triggered by the high death rate in the
mid-2020s. The fundamental explanation expected for this is the decline in US production
from 2020 to 2024. In the early 2020s, net oil imports projected to hit 3–4 MMbpd.
Coronavirus has a significant effect on the global economy, and thus oil demand, in particular
in the most likely cause of a deep and sustained recession linked to a prolonged pandemic.
Until mid-2023, the average crude oil price will remain below $50/bbl without active OPEC
action.
The results indicate that COVID-19 deaths toll has a significant impact on oil prices. However,
it mainly influences the situation reported in the United States. If we evaluate the case outside
the United States, we can see the positive impact on oil prices of the estimates of the COVID-
19 death. Hence the amplification of mortality risks in the stock market and the real economy
caused by the increasing economic instability in the United States.
The evidence from this study suggests the impact of the pandemic will surely reach oil prices,
which will continue to decline, at least in the short term, as a result of lower demand for crude
oil. Here comes the role of OPEC, a central element in reducing oil price losses through the
consent of OPEC members. The reduction in market production thus promotes crude oil prices
and improves cash resources.
Our work has led us to conclude OPEC and Saudi Arabia are confronted with daunting tasks to
challenge group unity. If OPEC is to manage effectively this decade, the quality of research,
strategy, and decision-making must be significantly improved. In the short term, it will be
challenging to adapt supply to the possibly faltering demand for recovery because of the
recovery of output from non-OPEC.

PART B: OPEC’s market structure is Oligopoly. An oligopoly is a market structure with a

small number of firms, none of which can keep the others from having significant influence.
The concentration ratio measures the market share of the largest firms. A monopoly is a
market with only one producer, a duopoly has two firms, and an oligopoly consists of two or
more firms. There is no precise upper limit to the number of firms in an oligopoly, but the
number must be low enough that the actions of one firm significantly influence the others.
• The term "oligopoly" refers to a small number of producers working, either explicitly or
tacitly, to restrict output and/or fix prices, in order to achieve above normal market returns.

• Economic, legal, and technological factors can contribute to the formation and maintenance,
or dissolution, of oligopolies.

• The major difficulty that oligopolies face is the prisoner's dilemma that each member faces,
which encourages each member to cheat.

• Government policy can discourage or encourage oligopolistic behavior, and firms in mixed
economies often seek government blessing for ways to limit competition.

Features:

1. Few Firms:
Under oligopoly, there are few large firms. The exact number of firms is not defined.
Each firm produces a significant portion of the total output. There exists severe
competition among different firms and each firm try to manipulate both prices and
volume of production to outsmart each other. For example, the market for automobiles
in India is an oligopolist structure as there are only few producers of automobiles.

The number of the firms is so small that an action by any one firm is likely to affect the
rival firms. So, every firm keeps a close watch on the activities of rival firms.
2. Interdependence:
Firms under oligopoly are interdependent. Interdependence means that actions of one
firm affect the actions of other firms. A firm considers the action and reaction of the
rival firms while determining its price and output levels. A change in output or price by
one firm evokes reaction from other firms operating in the market.
3. Non-Price Competition:
Under oligopoly, firms are in a position to influence the prices. However, they try to
avoid price competition for the fear of price war. They follow the policy of price
rigidity. Price rigidity refers to a situation in which price tends to stay fixed
irrespective of changes in demand and supply conditions. Firms use other methods like
 advertising, better services to customers, etc. to compete with each other. If a firm tries
to reduce the price, the rivals will also react by reducing their prices. However, if it
tries to raise the price, other firms might not do so. It will lead to loss of customers for
the firm, which intended to raise the price. So, firms prefer non- price competition
instead of price competition.

Question 2

Write your answer for Part A here.

• There are 92 articles per month with 8 journalists which are Determining the business
producing.

• The firm is making $2500 of profit.

• By Adding VARIABLE COST & FIXED COST we get the total cost per month and average
total cost per articles. Very next there is the calculation of Marginal cost by formula (change in
total cost/ change in articles produced). With $375 per article, from which we found total
revenue. Marginal revenue was calculated by (change in total revenue / change in articles
produced). Later we subtracted total costs from total revenue we got profit/loss. Where
MARGINAL COST = MARGINAL REVENUE is the profit maximizing output level. Below
table for your reference.
 Write your answer for Part B here.

• By taking care of maximizing profits of the firm, The firm would have to fire 4 Journalists.

• With reference to above table, New profit total is #4 – €1500

Question 3

Write your answer for Part A here.

INDIA faced two types of unemployment in such Pandemic, Like Structural Unemployment
and Cyclical Unemployment.

Structural Unemployment: Structural unemployment is a type of long-term unemployment

that can last for many years. Structural unemployment can have multiple causes, such as
workers not having the skills or training needed to qualify for the current job openings.

For example, major technological advances can occur in industries throughout an economy.
Companies need to hire workers who have the technical skills, such as computer programming
and mathematical skills, to propel their company forward. Individuals without those skills may
become marginalized and experience structural unemployment because there is a mismatch
between jobs in the market and their abilities.

The manufacturing sector in the United States has seen enormous technological advances over
the past few decades. Production lines that once employed many workers now have computers
and automated machines doing many of those jobs. Workers who are not skilled in computers
and software, which are used to run a production line, are left behind. With advances in
artificial intelligence (AI) in recent years, these technological changes are likely to accelerate.

Cyclical Unemployment: Cyclical unemployment is when the demand for goods and services
in an economy decreases, forcing companies to lay off workers in an effort to cut costs.
Companies generate revenue from the sale of goods and services, and when revenue decreases
dramatically, businesses experience a drop in their profits. In an effort to keep the business
afloat, companies lay off workers to reduce their labor costs. The aggregate number of workers
that have been laid off as a percentage of the working population is the cyclical unemployment
rate.

Cyclical unemployment can ebb and flow along with the business cycle, meaning that
economic growth as measured by gross domestic product (GDP) can rise and fall all the time.
When GDP growth declines, it typically leads to less demand for goods and services in an
economy, which in turn increases cyclical unemployment. As a result, cyclical unemployment
is usually inversely correlated to GDP growth, meaning it rises with lower GDP growth and
decreases with higher GDP growth.

Cyclical unemployment is a temporary condition, albeit it can last for years if a recession is
severe enough. Cyclical unemployment depends on the length and severity of an economic
contraction. However, as an economy recovers from a recession, businesses experience an
increase in demand for their goods and services, leading to more workers being hired and a
decrease in cyclical unemployment.

Write your answer for Part B here.

The COVID-19 recession is a global economic recession caused by the COVID-19 pandemic.
The recession began in most countries in February 2020.

After a year of global economic slowdown that saw stagnation of economic growth and
consumer activity, the COVID-19 lockdowns and other precautions taken in early 2020 drove
the global economy into crisis. Within seven months, every advanced economy had fallen to
recession.

The first major sign of recession was the 2020 stock market crash, which saw major indices
drop 20 to 30% in late February and March. Recovery began in early April 2020, as of April
2022, the GDP for most major economies has either returned to or exceeded pre-pandemic
levels and many market indices recovered or even set new records by late 2020.

The recession saw unusually high and rapid increases in unemployment in many countries. By
October 2020, more than 10 million unemployment cases had been filed in the United States,
swamping state-funded unemployment insurance computer systems and processes. The United
Nations (UN) predicted in April 2020 that global unemployment would wipe out 6.7% of
working hours globally in the second quarter of 2020—equivalent to 195 million full-time
workers. In some countries, unemployment was expected to be around 10%, with more
severely affected nations from the pandemic having higher unemployment rates. Developing
countries were also affected by a drop in remittances and exacerbating COVID-19 pandemic–
related famines.

During 2019, the IMF reported that the world economy was going through a "synchronized
slowdown", which entered into its slowest pace since the Global Financial Crisis. 'Cracks'
were showing in the consumer market as global markets began to suffer through a 'sharp
deterioration' of manufacturing activity. Global growth was believed to have peaked in 2017,
when the world's total industrial output began to start a sustained decline in early 2018. The
IMF blamed 'heightened trade and geopolitical tensions' as the main reason for the slowdown,
citing Brexit and the China–United States trade war as primary reasons for slowdown in 2019,
while other economists blamed liquidity issues.
 In April 2019, the U.S yield curve inverted, which sparked fears of a 2020 recession across the
world. The inverted yield curve and China–U.S. trade war fears prompted a sell-off in global
stock markets during March 2019, which prompted more fears that a recession was imminent.
Rising debt levels in the European Union and the United States had always been a concern for
economists. However, in 2019, that concern was heightened during the economic slowdown,
and economists began warning of a 'debt bomb' occurring during the next financial crisis. Debt
in 2019 was 50% higher than that during the financial crisis of 2007–2008.Economists have
argued that this increased debt is what led to debt defaults in economies and businesses across
the world during the recession. The first signs of trouble leading up to the collapse occurred in
September 2019, when the US Federal Reserve began intervening in the role of investor to
provide funds in the repo markets; the overnight repo rate spiked above an unprecedented 6%
during that time, which would play a crucial factor in triggering the events that led up to the
crash.

Question 4

Write your answer for Part A here.

Due to the measures adopted to prevent the spread of the Coronavirus Disease 2019 (Covid-
19), especially social distancing and lockdown, non-essential expenditures are being
postponed. This is causing aggregate demand to collapse across the globe. Rajeswari Sengupta
argues that the problem could be more acute and longer lasting in India owing to the parlous
state the economy was in before Covid-19 struck, and discusses policy options to deal with the
economic crisis.

We are in the middle of a global pandemic, which is inflicting two kinds of shocks on
countries: a health shock and an economic shock. Right now, most of the policy focus is on the
health shock, but soon it will become clear that the economy is also facing a serious problem.
In this, India is not unique. All countries in the world will have to deal with the economic mess
that the health shock will leave behind. But the mess may be particularly bad in India because
the economy was in a weakened state when the shock hit us. And while the health shock will
be temporary, the economic crisis it is triggering will affect us for a much longer period.

In such circumstances, it is tempting to address the problems using piecemeal and drastic
measures, such as imposing directed lending, bans, or price controls. These measures
effectively supplant the market mechanism with a politically driven allocation of resources. In
some cases, this might be necessary. It is possible that some industries, such as aviation, will
need to be bailed out using State resources. But these cases should be few. In general, the goal
should be to make the market system work more effectively, helping it rather than hindering it.

Consider, for example, the plans to impose further rules on banks, directing their lending,
telling them which loans to forgive, instructing them not to classify delinquent loans as non-
performing assets (NPAs) and so on. The aim of such measures is laudable. The objective is to
ensure that more firms are saved. The effects however are likely to be counterproductive. To
the extent that weak banks are being asked to save certain weak firms, the former will try to
protect themselves by being more cautious in their lending to the stronger firms. As a result,
stronger firms may be denied credit in favour of the weaker ones, the opposite of what we
need to happen.

The effects of such a distortion will reverberate on the banking system itself. To the extent that
bank lending portfolios become riskier – because inherent risk has increased and policies have
shifted the mix towards more risky borrowers – an already weak banking system will be made
more fragile. The more this fragility is disguised –because the NPA figures do not reflect the
full extent of their bad loans – the more confidence in the system will get undermined and
investors will suspect the worst. The cost of bank funds will increase, and these costs will get
passed on to the borrowers who are already struggling financially.

In general, care must be taken to avoid measures that may have some benefits but will also
have severe side-effects, which can do lasting damage to the economy and society. Most
importantly, it is critical to maintain the credibility of institutions during these troubled times.
It takes decades to build institutions and months to erode their capacity and credibility.
Below are examples taken from Govt. of INDIA to deal with the crisis:

1. MNREGA guarantees 100 days of wage-employment in a year to a rural household

whose adult members are willing to do unskilled manual work at state-level statutory
minimum wages.
2. Pradhan Mantri Jan Dhan Yojana is the Indian government’s flagship financial
inclusion scheme. It envisages universal access to banking facilities with at least one
basic banking account for every household, financial literacy, access to credit
insurance, and pension facility.

Write your answer for Part B here.

India responded to Covid-19 as soon as it was becoming clear that a pandemic was in the
offing. The government imposed a sudden nationwide total lockdown on March 25, 2020. This
lasted until end of May 2020 and was then lifted in phases subsequently. The country suffered
a severe economic contraction with Gross Domestic Product (GDP) estimated to have fallen
by 24% in Q1 FY 2021 and by 7.3% in FY 2020-21 as a whole. The policy response to the
economic impact of both the pandemic and the consequent lockdown was the usual mix of
fiscal, monetary and financial measures, but relatively light on fiscal measures. At 2-2.5% of
GDP, India’s stimulus spending has been at the lower end amongst emerging markets.

As the monetary authority, the Monetary Policy Committee (MPC) laid a triple objective of
mitigating negative effects of the virus, reviving growth and preserving financial stability. To
ease economic hardship while keeping inflation in check, the RBI slashed interest rates
keeping the policy repo rate at a low of 4%. The cash reserve ratio (CRR) was lowered, which
provided additional liquidity to help aid banking system. The goal was to ensure that no part of
the financial system faced liquidity concerns or credit constraints.

To tide over the pandemic, it was paramount for government and the central bank policies to
work in tandem. To ensure that governments did not have to cut their spending due to
shortfalls in revenue, RBI needed to enable both central and state government to borrow
adequately in debt markets. As a banker to the central and state governments, the limit on
ways and means advances for both central and state government were increased. Aside from
this, through open market operations, RBI purchased about 30% of central government’s net
market borrowings in FY 2021 and has committed to continue to purchase substantial amounts
in FY 2022 through the G-sec Acquisition Programme.

Special OMOs – through Operation Twist (OT) involving the simultaneous purchasing of
long-term government securities and selling corresponding short-term securities of similar
amounts in a liquidity neutral fashion, have lowered long-term yield and smoothened the
curve. The Reserve Bank was successful in managing the large government borrowing in FY
2021 at a weighted average borrowing cost for the central government, at just 5.79%, the
lowest in 16 years.

Overall, the RBI, in cooperation with the Government of India, has succeeded in achieving its
broad objective of keeping financial intermediaries, financial markets and the financial system
as a whole sound, liquid, and functioning smoothly. It has maintained financial stability
despite initial conditions of the Indian financial intermediaries being stressed as a consequence
of legacy problems. But very significant challenges remain as this crisis unfolds further in both
India and the rest of the world. It has also protected households as well as small and large
businesses from experiencing acute financial stress for the time being, but stresses will emerge
once regulatory forbearance is lifted.