Economic Impacts: COVID-19, Financial Crisis, Demographics, and Migration
COVID-19 Crisis vs. Financial Crisis
1. Origins of the Financial Crisis
Main causes: Low interest rates, huge savings from China and other Asian countries, self-fulfilling expectations, subprime mortgages, and the real estate bubble in the US, whose burst led to a financial crisis.
Consequences: Significant asset price decreases, the stock market crash in 2008, and financial and non-financial bankruptcies. The crisis affected the real economy of the world through several channels: a collapse in international trade, poverty effects, loss of confidence in financial markets (liquidity restrictions), and a fall in aggregate demand.
2. Financial Crisis vs. COVID-19 Crisis
Similarities: Uncertainty and magnitude of effects.
Differences: Different transmission mechanisms and recovery paths (COVID-19 much quicker due to automatic stabilizers).
- COVID-19: First, a large supply component resulted in the contraction of demand. It quickly spread to the rest of the economy, and there was a very strong policy response.
- Financial: First, a large demand component resulted in the contraction of supply. It gave place to the subprime crisis, which resulted in poverty effects and a contraction of aggregate demand.
Purchasing Managers Index (PMI): An index of the current direction of the economic trends in the manufacturing sector. It captures whether market conditions are expanding (PMI > 50) or contracting (PMI < 50). It is constructed using monthly survey responses from supply chain managers of 19 industries.
3. Comparison of Effects on Production
Large effects in both crises in terms of output, larger effects for developed countries. This effect is more pronounced during the financial crisis and much less in the COVID-19 crisis. Both crises brought severe contractions in manufacturing, and in COVID-19, there was a larger effect on services.
4. Effects on Unemployment
Financial: Large unemployment effects.
COVID-19: Also imbalances but quicker recovery.
5. Effects on Current Account Imbalances
Big imbalances, future financial support, but imbalances are not predicted to last.
6. Effects on Trade
Reduction in international trade, but why such a reduction? Because of dependence on financing, global supply chains and distribution, simultaneous fall in aggregate demand in multiple world zones, and a fall in consumption of durable goods and business investment.
7. Future Projections
Extreme poverty has increased, more poor people, inflation is growing because the economy is reopening very fast, and there are high energy prices that are pushing up inflation. Inflation is expected to go down over 2022, and supply is expected to catch up with demand. Energy prices may continue to rise.
Population and Migration
1. Relationship Between Demographics and Economics
Economic changes cause demographic changes and vice-versa; they are both correlated and respond to common causes.
2. World Population
1950: Explosion of population. Behind this phenomenon is the Industrial Revolution and the antibiotics that fight against child diseases. Prediction: The population is going to continue growing, but other predictions say the population is going to decrease, others that it is going to increase but at a lower rate.
3. Urbanization
Our future is urban.
4. Demographic Transition: The Model
Projection of the birth rate and death rate to converge around 2100. The birth rate has been decreasing since 1950 and still is.
The Demographic Transition Model: It is based on historical trends of birth rate and death rate. The model predicts that a country’s population growth rate goes through several stages as it develops.
- Stage 1 (High Stationary)
- Stage 2 (Early Expanding)
- Stage 3 (Late Expanding)
- Stage 4 (Low Stationary)
- Stage 5 (Declining?)
Developed Countries: In these countries, the birth rate is decreasing while the death rate is increasing. In fact, they have crossed each other these days, and now the death rate is higher than the birth rate.
Developing Countries: Both the birth rate and the death rate are decreasing; however, there are projections that both will slightly increase.
5. Population Aging
Life expectancy increases over time, so we see that nowadays the population is aging.
Remaining Life Expectancy (RLE): Indicates to what age a person would live on average if the mortality assumptions per age which apply to that particular year are projected onto the remainder of their lives.
Health-Adjusted Life Expectancy (HALE): Average equivalent number of years of full health that a person could expect to live (these are new measures of aging).
Consequence of Aging: Population aging will put financial pressure on old-age support systems, which will have impacts in all areas of life (consumption, investment, labor markets, pension systems, housing, health services, policies, etc.).
Caring Economy: The sector of the economy that is responsible for the provision of care and services that contribute to the nurturing and reproduction of current and future populations.
6. Migration
Causes of Migration: Can be, in general, attributed to economic, political, social, and/or demographic factors. Experts typically refer to two opposing factors: 1) attraction factors (pull) or expulsion factors (push).
Characteristics of Migration: Different levels of migration across the world, relatively less importance when compared with the flow of goods, more variety, high presence of women, rising diversity, issues with illegal/irregular migration, more transnational capital, and higher levels of migration in North America, Europe, or Australia.
Effects of Migration:
- Receiving Country: Welfare state impacts (tax revenue, pensions, education, and health), rejuvenation.
- Sending Country: May alleviate pressure on labor markets, remittances, risk of brain drain, and potential increase of human capital if returns.
Current Trends and Projections:
- World population continues to increase, but growth rates vary greatly among regions.
- Rapid population growth presents challenges for sustainable development.
- In some countries, the growth of the working-age population is creating opportunities for economic growth.
- Women are having fewer babies.
- People are living longer.
- The world’s population is growing older.
- Countries are facing a reduction in population size.
- Migration is a major component in population changes.
Debrief: Econland Simulation
Rollercoaster: More difficult scenario, typical for financial crises.
Stagflation: More difficult scenario, policies do not work at all.
Corporate Tax Rate: Percentage of profits firms need to pay as tax to the government.
Income Tax Rate: Percentage of their income that citizens need to pay as tax to the government.