It is important that you are aware of current issues to do with the New Zealand and the World Economy. Examiners always like students to relate current issues to the economic theory as it gives a good impression of being well read in the subject. Only use these indicators if it is applicable to the question.
Indicators that you might want to mention are below. Notice how low global interest rates are as economic conditions have warranted greater borrowing and spending in the world economy.
The New Zealand Economy
Annual economic growth may have peaked, with NZIER Consensus Forecasts expecting economic growth of 3.3 percent for the year ended March 2015 (although the Reserve Bank has the economy expanding by 3.6 percent). Fonterra will be watching international dairy auction results closely, as their latest payout forecast is based upon a lift in dairy prices from current levels. Survey results are consistent with further employment growth, albeit at a more moderate pace. The Reserve Bank is expected to keep the official cash rate on hold for the remainder of 2014 (at least), while further intervention in the foreign exchange market is a possibility.
The Global Economy
The world is now expected to grow by only 3.3pc in 2014 and 3.8pc in 2015, say the IMF. Falling prices have continued to act on a drag on growth in advanced economies.
The IMF thinks inflation remains “too low” and the threat of outright deflation – or negative prices – should continue to concern policy-makers.
One of the reasons inflation has failed to take off, despite growth in many parts of the advanced world, is due to the existence of an ‘output gap’ in a number countries.
This is the term economists use to describe the level of spare capacity in an economy, or the difference between current and potential growth.
A negative output gap indicates an economy is running below potential and has a way to go before growth begins to generate inflationary pressures, forcing interest rate hikes. The United States has the largest negative output gap in the developing world of around 3.5pc of potential GDP