Argentina Project - Essay Example

?Argentina’s GDP & inflation: The GDP of a country is a measurement of the worth of the economy. It is measured by the value of transaction in goods and services at the market price in the given period. Gross Domestic Product is given by the equation Y + T = C (Y –T) + I (r) + G + (X – M) Where, Y = National Income T = Tax C (Y-T) = Consumption which is a function of disposable income (Y – T). I (r) = Investment which is a function of rate of interest G = Government Expenditure X = Value of Export M = Value of Import Therefore, (X-M) = Balance of Trade The GDP of Argentina has exhibited a consistent growth since 2005. It shows the economy has grown over the year in terms of value added by the goods and services produced in the country. GDP of Argentina (2005 - 2010) Year GDP per capita (constant 2000 US$) 2005 8097.418686 2006 8097.418686 2007 8699.009376 2008 9359.588686 2009 9893.811398 2010 9880.474096 Source: World Databank, 2011 World Databank 2011 The above data collected from the World Databank gives us the GDP of Argentina from 2005 to 2010. The increase in the GDP shows that the economy is expanding. However we must also see the price level and the inflation of the country. Some of the index used to measure the price levels are GDP deflators and the Consumer Price Index. The following figure illustrates the price level of Argentina based on the two indicators. Indicators for Inflation (2005- 2010) Year Inflation, GDP deflator (annual %) Consumer price index (2005 = 100)       2005 8.840489896 100.00 2006 13.42627796 110.90 2007 14.25823933 120.70 2008 19.06845032 131.06 2009 9.977458276 139.28 Source: World Databank 2011 The data collected from the World Databank gives us an insight into the inflation prevalent in Argentina. Initially, the GDP deflator exhibits that the Real GDP grew slower than the nominal GDP which means the price level rose in that period. However the GDP deflator decreased sharply in 2009. The Consumer Price Index exhibits a steady rise in the period from 2005 to 2009. We shall also consider the Unemployment Rate of Argentina. The trend of inflation has further been demonstrated by the GDP deflator curve in the following diagram... World Databank 2011 The Consumer Price Index number shows an increase over time. World Databank 2011 The trend confirms that though the consumer price index has grown steadily across time, the GDP deflator experienced a sudden drop in 2009. Unemployment The relationship between inflation and unemployment is inversely proportional. According to the theory of Phillip’s Curve, a country experiences a drop in unemployment with a rise in inflation. We shall take a look at the unemployment rates of the country in the corresponding years. Unemployment Rate of Argentina (2006 - 2010) Year Unemployment Rate Change 2005 14.8 -14.45% 2006 11.6 -21.62% 2007 8.7 -25% 2008 8.5 -2% 2009 7.9 -2.06% 2010 8.7 10.13%       (Indexmundi, 2011; World Databank, 2011) The unemployment rate shows a decrease over the years 2005 to 2010. This indicates the country performing well in terms of employment to their citizen. (Indexmundi, 2011; World Databank, 2011) Therefore we see that in Argentina inflation and unemployment follows an inverse relation which confirms the theory of Phillip’s Curve. Monetary Supply of Argentina A rise in the money supply will lead to a rise in the demand for assets. An increase in money supply changes the balance between interest rate and money supply in the market. The surplus money holding of the people will be utilized to purchase assets. As a large number of people compete to purchase assets, there will be a shortage of assets. As a result there will be an adjustment of the interest rate of the assets. The interest rate of the assets will fall at the point where people are willing to purchase less number of assets. At that point they will be willing to hold more liquidity. In this way a new equilibrium will be established. Therefore there exists an inverse relation between money supply and interest rate, at a constant price level. A rise in money supply will lead to a fall in interest rate.(4) Many economists argue that the price level increases at a constant rate when the money supply of the economy is increased by the central bank In Argentina, there exist a constant rate of inflation which is within the limits of control. We also saw how inflation benefits the country in reducing their unemployment. Considering the positive impact of the money supply on the unemployment, and the moderate rate of inflation, the money supply should be maintained at the current rate (Karl, 2007, p. 583; Krugman, 2008, p.359). Fiscal Policy The GDP of a country is given by the equation Y + T = C(Y-T) + I(r) + G + (X – M) In course of their fiscal decisions, the government may undertake a fiscal policy to increase the tax rate of the country. A decrease in the tax rate will initially lead to a rise in the disposable income of the people. This will lead to rise in the consumption spending. As a result the Y rises in the next period. This will lead to another round of rise in the consumption. In this way the final rise in the GDP will be higher than the initial decrease in tax due to cumulative effect. This is called the multiplier effect. Most taxes are aimed to benefit a specific income group. A decrease in tax for the lower or income group will have a higher multiplier effect on GDP. The high income groups mostly have the maximum consumption. Therefore a decrease in tax will not lead to much increase in consumption. In Argentina 44% belongs to the middle income group. So a tax discount should ideally be targeted at them to have the maximum impact on GDP (Roy, 2005, p.118; Argentina, n.d.). Structural Policy Structural policy refers to a wide range of issues including factor of productivity and everything affecting factors of productivity including technological change. The Argentinean economy is characterized by a constraint of resources mainly capital. As a result existing technologies are optimally implemented. However any technological advancement has a positive impact on the various sectors of the Argentine economy including agriculture. Apart from that considerable efforts must be given to the development of education in order to develop human capital for future development. Argentina has a rich history of factor productivity and development of education and technology will help the country for further progress. (Bour, n.d.; Aragon, n.d.). Bibliography 1. Argentina Unemployment Rate (n.d.), Index Mundi, available at: http://www.indexmundi.com/argentina/unemployment_rate.html (accessed on April 20, 2011) 2. Aragon, A. H. (n.d.), Factor Productivity in the Argentinean Agriculture, AAEP, available at: http://www.aaep.org.ar/anales/works/works2002/boure.pdf (accessed on April 20, 2011) 3. Argentina (n.d.), Latameconomy, available at: http://www.latameconomy.org/fileadmin/uploads/laeo/Documents/Country%20Note%20Argentina%202011.pdf (accessed on April 20, 2011) 4. Bour, E.A. (n.d.), Productivity, Competitiveness and Enterprises in Argentina: The Convertibility Period, AAEP, available at: http://www.aaep.org.ar/anales/works/works2002/boure.pdf (accessed on April 20, 2011) 5. Karl, C.E. (2007), Principles of Economics, Delhi. Pearson Education India. 6. Krugman (2008), international Economics: theory and policy, Delhi, Pearson Education India 7. Roy (2005), Macroeconomic Policy Environment, Delhi, Tata-McGraw Hill Education. 8. World DataBank (April 14, 2011), available at: http://databank.worldbank.org/ddp/home.do?Step=3&id=4 (accessed on April 20, 2011) 9. Wenzel, T. (2009), Beyond GDP – Measuring the Wealth of Nations, Munich, GRIN Verlag Read More