Explain, with the aid of both AD/AS and Keynesian Cross diagrams, the decrease in the deflationary gap experienced by the country using nominal GDP for calendar 2020 and 2021 and average prices for 2020 and 2021.
1.0 National income – The Pandemic Economy
1.2 In Trinidad and Tobago, the continuation of the pandemic and the associated public health restrictions undermined all the economic gains realized in the second half of 2020. Consequently, for the first quarter of 2021, the CSO estimates that real GDP at Basic prices also fell by 7.4 percent primarily as a result of a 9.5 percent contraction in Energy Sector activity and 5.9 percent fall in Non-Energy GDP.
2.1 Oil and gas prices have since rebounded from their lows in 2020 and continue to rally in 2021. In September 2021 crude oil prices rose by more than 90 percent, while natural gas prices surged by more than 180 percent over the average price for calendar 2020. These developments are expected to positively impact Nominal GDP and Government’s earnings, with spillover effects on
Consequently, the Overall Deficit was revised to 16,319.2 million or 11.2 percent of
GDP. Total Revenue and Grants of $37,052.6 million (24.8 percent of GDP) and Total Expenditure of $50,794.2 million (34.0 percent of GDP).
3.0 The Twin Evils –
Headline inflation, which is measured by the year-on-year rate of change in the All Items Retail Price Index (RPI), increased to 2.2 percent in July, from 0.9 percent in January, primarily reflecting inflationary pressures both within food and some core components of the RPI. Inflation previously averaged 0.6 percent in 2020. Unemployment data for 2021 is unavailable. However, information on retrenchment notices and other indicators monitored by the Central Bank of Trinidad and Tobago suggest that labour market conditions remained constrained in 2021. The re-instatement of COVID-19 mitigation measures culminating in the imposition of a limited state of emergency, following a spike in the country’s COVID-positive caseload in April 2021, would have impacted person’s ability to work or find work.
4.0 Public Debt
Adjusted General Government Debt, which constitutes Central Government Domestic Debt, Central Government External Debt and Government Guaranteed debt that is serviced by the Central Government, is estimated to increase from $118,399.1 million in fiscal 2020 to $126,622.5 million by the end of fiscal 2021. As a percentage of GDP, the Adjusted General Government Debt will increase from 79.6 percent at the end of fiscal 2020, to 84.8 percent at the end of fiscal 2021.
5.0 Foreign Exchange Market
5.1 Over the period October 2020 to August 2021, total sales of foreign exchange amounted to US$6,182.40 million, 4.5 percent lower than the amount sold over the same period one year earlier (US$ 5,905.80). Of this amount, sales of foreign exchange by authorised dealers to the public amounted to US$4,166.0 million; 7.5 percent lower than the amount sold in the same period one year earlier (US$4,502.7 million). The other component, Net Sales of Foreign Exchange which includes Central Bank interventions and the Central Bank’s Foreign Exchange Liquidity Guarantee Facility, also fell by 6.4 percent to US$1,164.3 million. Whilst sales of US dollars through the Foreign Exchange Facility and Public Sector Facility increased by 32.1 percent from US$435.7 million over the period October 2019 to August 2020 to US$575.4 million over the same period of
fiscal 2021. As in the previous fiscal period, sales in excess of US$20,000 were mainly directed to the distribution sector, energy companies and for credit card transactions.
6.0 International Trade
For the nine-month period ending June 2021, Trinidad and Tobago’s Balance of Visible Trade registered a $10,288.6 million surplus, an exponential increase when compared to the $1,987.8 million balance recorded for the same 2020 period. This improvement in the
Question:
b. Explain, with the aid of both AD/AS and Keynesian Cross diagrams, the decrease in the deflationary gap experienced by the country using nominal GDP for calendar 2020 and 2021 and average prices for 2020 and 2021.
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