Irish Economy Development - Essay Example

?Economics Table of Contents Economics Table of Contents 2 Irish Economy at the verge of “Double-dip recession” 3 “During the second quarter of Irish gross domestic product fell by 1.2%” 3 “Keynesian style stimulus package” 4 References 8 Bibliography 8 Irish Economy at the verge of “Double-dip recession” A “double-dip recession” is that in which the concerned nation’s GDP growth rate could be represented as a W-shaped graph. This is normally the case when the concerned nation experiences a recession first, which is followed by a short lived period of recovery and lastly, a recession once again, so that there are in all two recessions that the economy experiences. It is mostly noted in developed nations or those passing through a phase of transition (United Nations, 2010, p. 26). Specifically, the term ‘period’ here implies a single quarter, so that “double-dip recession” is actually a phenomenon taking place over three quarters. A period of recession is normally defined as that when the GDP growth rate is found to be negative. Thus, in case of double-dip recession actually, the economy experiences two periods of negative growth rates separated by a period of positive growth. However, any two consecutive periods of negative growth might not mean that the concerned country is submerged under recession. Usually, when a country spends two successive quarters under negative GDP growth rates, it declares itself to be under recession (Arnold, 2008, p. 151). “During the second quarter of 2010 Irish gross domestic product fell by 1.2%” When the Irish economy experienced a dip in its GDP during the second quarter of 2010, it was a stark 1.2% fall from what it had yielded during the first quarter. Thus, the GDP growth rate of Ireland during the second quarter was lower by 1.2% than what it had been in the preceding quarter. This drop had a number of implications upon the economy including lower employment opportunities leading to lower demand and lower production of output in the nation. This reduction actually implied the GDP growth rate to fall down to negative levels shoving the nation to a phase of recession. In order to make adjustments with this reduced growth rates, the national government had to compromise with its budget position as well to make its both ends meet. This fall in GDP growth rate had been a second to a similar dip during the fourth quarter of 2009, which is why the nation feared the possibility of a “double-dip recession” (Breadun, O’Brien & O’Brien, 2010). “Keynesian style stimulus package” Keynes had mainly emphasized upon the implementation of demand triggering policies for an economic boost. However, a positive shift in aggregate demand is least possible when an economy follows a stringent budget regime as the case had been for the Irish economy. In fact, a stringent budget policy is one of the reasons why the economy could not surpass over its recessionary phase successfully that tended a come-back within a short span. This is one of the reasons, why “Irish trade unions have stated that the previous austerity budgets have failed” and hence, have proposed that a “Keynesian style stimulus package” be followed. The Keynesian model of equilibrium proposed the following identity to equate aggregate national income, Y, with components of aggregate demand as follow – Y ? C (Y – T) + I + G + (X – M(Y)) Where, Y = National Income, T = Aggregate tax being paid. Hence, (Y – T) = Disposable Income C = Consumption Expenditure, I = Investment Expenditure, G = Government Expenditure, X = Aggregate Export Revenues M = Aggregate Imports Thus, four ways through which a stimulus package could be constructed to ensure an economic boost are as follows – Firstly, Keynes had advised a stimulus to be provided to the investors of the economy so that they should come forward and venture investment projects which could help in creating employment opportunities and thus, boost consumption demand through positively affecting the production of output. Secondly, the government could actually make tax relaxations to motivate people to consume more as they will be left with larger disposable income volumes. Greater the disposable income is, higher will be the consumption expenditure of the people and thus, higher will be the income generation in the economy. Thirdly, the national government must not make deductions in its own expenses and rather boost them which could actually result to increases in the aggregate demand of the economy and thus, its income level. This is starkly in contrast to the measures adopted by the Irish government which is that of restricting its budget expenditures or rather constraining it more. Lastly, the national government could also make adjustments in its rate of exchange so as to positively influence the demand for exports and negatively affect import demands. For instance, an economy amidst a recession could choose to depreciate its domestic currency so that the foreigners find it more and more lucrative to increase their purchases from the country in question, while the domestic people are back off from importing from nations which have a dearer currency. All the aforementioned four policies could be realized through an AD-AS analysis as depicted by means of the diagram alongside. The downward sloping red curves indicate the AD curves. The continuous curve is the original one while the dotted one is the outcome of the above policies. On the other hand, the upward sloping blue curve represents the aggregate supply curve. The equilibrium point F is actually the original one while E is the one produced later. Hence, it is found that a hike in aggregate demand component owing to the above four policies, could lead to a betterment in the economic position leading to increased output, thus recovering the economy from recession. However, this rise in output is also associated with an increase in the general price level of the economy. Relation between aggregate demand and monetary policy The Irish government has often implemented monetary policy as one of its primary tools to check recessionary developments in the nation. Monetary policy generally means an adjustment in the market rates of interest in a way favorable for returning the economy back to normality. Rate of interests can directly affect the aggregate investment and aggregate consumption in an economy, which are the primary ways through which the aggregate demand could be regulated. During periods of recession, when it is necessary to boost the nation and increase the circulation of money within the economy, the national government often lowers the rate of interest. Lower the rate of interest is, lower will be the willingness among people to save their money through increasing their volumes of bank deposits. Moreover, people will be more instigated to increase their present consumption at the expense of their future ones. Hence, there is an increase in the amount of present consumption in the economy. On the other hand, lower the rate of interest is, investors will be more and more encouraged to borrow sums from banks which automatically increases the gross amount of investment in the nation. Hence, reductions in the rate of interest could lead to increases in consumption expenditure and investment demand leading to increases in aggregate demand in the nation. However, in case that the Irish economy continues with this policy, it might land up amidst some future problems. A low rate of interest could increase the demand for loans in the economy although the national banks would receive negligible amounts of deposits. Hence, in order to keep up with the increased demand for loans, the domestic banks have to depend upon foreign ones over the long run, which makes them liable to these foreign organizations. References Arnold, R. A. (2008). Economics. USA: Cengage Learning. Breadun, D., O’Brien, D. & O’Brien, C. (September 23, 2010). “Taoiseach denies economy facing double-dip recession”. Irish Times. Available at http://www.irishtimes.com/newspaper/breaking/2010/0923/breaking19.html [Accessed: June 1, 2011]. United Nations (2010). World Economic Situation and Prospects 2010. USA: United Nations Publications. Bibliography Case, K. E., and R. C. Fair. Principles of Economics (8th ed). New York: Doring Kindersley, 2007. Holt, R. P. F. & Pressman, S. (2001). A new guide to post Keynesian economics. London, UK: Routledge. Johnson, H. G. (1982). On economics and society. USA: University of Chicago Press. Krugman, P. (2008). International economics: theory and policy. USA: Pearson. Mankiw, N. G. (2008). Principles of economics. USA: Cengage Learning. Samuelson, P. A. (2005). Economics (18th ed.). New York, India: McGraw-Hill. Wessles, W. J. (2006). Economics (4th ed.). USA: Barron’s. Read More