AS-AD model
Aggregate demand & Aggregate supply
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Case Study
Hong Kong Economy in 2020-2021
Hong Kong Economy in 2020-2021
Promoting the long-run growth of an economy is always one of the most important goals of policymakers. To achieve the goal, the Hong Kong government implements an array of policies to support various industries every year through the Policy Address and the Budget.
Source A: Composite CPI and nominal wage rate of Hong Kong in 2020-2021
Source A: Composite CPI and nominal wage rate of Hong Kong in 2020-2021
To measure the change in the price level of an economy, we often refer to the change in Consumer Price Index (CPI). The graph illustrated the quarterly percentage change in composite CPI and wage rate (in nominal terms) of Hong Kong in 2020-21. Furthermore, to facilitate the analysis, we divided the time horizon into 3 periods.
Source B: Composite CPI and 1-year interest rate of Hong Kong in 2020-2021
Source B: Composite CPI and 1-year interest rate of Hong Kong in 2020-2021
1-year interest rate means the amount a lender charges a borrower on a percentage basis when the borrowing term is 1 year. The graph showed the quarterly percentage change in composite CPI and the spotted 1-year interest rate of Hong Kong in 2020-21. Furthermore, to facilitate the analysis, we divided the time horizon into 3 periods.
Source C: Excerpt of the 2020-21 Budget
Source C: Excerpt of the 2020-21 Budget
The Government has been promoting re-industrialisation in Hong Kong through the provision of infrastructural, financial, technological and talent support. We will inject $2 billion into the Innovation and Technology Fund for launching the Re-industrialisation Funding Scheme to provide financial support for manufacturers on a matching basis for setting up new smart production lines in Hong Kong. We will also provide the Hong Kong Science and Technology Parks Corporation (HKSTPC) with an additional funding of $2 billion for converting an old factory in the Yuen Long Industrial Estate into a Microelectronics Centre to provide modern manufacturing facilities.
Source D: Views on the above policy in Hong Kong
Source D: Views on the above policy in Hong Kong
A manufacturer: "With more advanced equipment and technology, the productivity of high value-added goods will increase by 20%."
A government official: "Innovation and technology (I&T) is an important growth engine for future economic development. We have implemented a series of measures for the development of I&T."
An HKSTP start-up founder: "We provide I&T products and services to international customers."
A venture capitalist*: "I&T industry in Hong Kong is a good investment opportunity for us as it has huge potential to thrive."
*A venture capitalist (VC) is a private equity investor that provides capital to companies with high growth potential in exchange for an equity stake
POINT TO DISCUSS:
Refer to source A. Which period(s) did they match with the upward sloping SRAS curve theory? Explain.
Hint: Recall the property of upward sloping SRAS curve and its meaning on the AS-AD diagram. Observe the movement of CCPI and nominal wage rate at the same time.
Hints and Related Concepts
Related Concepts:
Refer to source B. Which period(s) did they match with the downward sloping AD curve theory? Explain.
Hint: Recall the property of downward sloping AD curve and its meaning on the AS-AD diagram. Observe the movement of CCPI and interest rate at the same time.
Hints and Related Concepts
Related Concepts:
Refer to sources C and D. Which components of the aggregate demand may change? Explain.
Hint: Identify the respective change in demand-side factor and supply-side factor.
Hints and Related Concepts
With an aid of an AS-AD diagram, explain the effect of the policy in source C on the output level in the long run.
Hint: Understand the mixed effect of policies on AD/SRAS/LRAS and apply it on the AS-AD diagram
Hints and Related Concepts
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