Institutional Changes in Europe - Essay Example

? College Introduction The article is based on various al changes that occurred in Europe and how these changes affected the general business cycle in European countries. To know the changes that have occurred, the article examines the nature of the business cycle before the institutional changes were implemented and the impact felt in the business cycle after the changes. The article examines three changes that were felt all through Europe in the past twenty years. Taken from academician’s point of view, the article critically examines the effect of each financial change on the overall business cycle. The overall decision of this article is not based on a single business or fewer businesses rather it is based on the overall average effect felt on most businesses in the entire European continent. In addition to this, the article examines three specific countries that were not within Europe during the historic transformation and how the business cycle performed compared to the ones within the European region. The outcome expectations of the study were that there would be an avenue that arises due to the changes made. This will therefore create new opportunities for the business cycle. This paper however is a critical analysis of the article. The paper looks at the economic principles that are found in the article and their overall significance on the entire business cycle. Five microeconomic indices are identified and each is defined and explained in detail giving out its economic impact on this scenario. After all this, the paper finally gives a conclusion on all the information and how it has affected the overall business cycle in the region. Economic principles related to the article There are many economic principles applied in this article, however for this particular paper, only three will be discussed to come to a conclusion about the overall economic impact of these principles. The first economic principle seen here is the principle that people face trade off’s meaning that every action has an economic cost. This means that when one thing is implemented, then there is another that has been shorter down. So if one moves from selling tomatoes to selling onions then the economic benefits of selling tomatoes is gone. From the article, euro was adopted as a single currency to serve 17 different countries. This was a good move to enable trade to develop in the 17 countries and lead to a lot of opportunities. However before the introduction of the euro as a single currency to serve the entire region, each of the 17 countries had banks and other stakeholders who traded in force to make a living. This means that after the adoption of the euro, several of these opportunities were lost hence leading to a slight change in the overall business cycle especially for banks that play a major role in the economy of a particular country. This transition will also mean that most of the money exchange businesses will have to either face out or reduce due to the use of one currency over the entire region (Eichner, 2011). This makes the region harder to economically compare themselves with great economic giants like the US which has a lot of money exchange businesses. The second most prevalent economic principle is that the cost of something is what you give up to get it. This principle means that whenever we want something new, we do some changes, and then we have to undergo some costs that are exactly the same as what we are losing. This means that before the implementation of anything, we have to be sure that the cost of the new product is much more than the cost of the older product. In the article, the entire European region set up a common central bank to serve the entire region. This means that if before this each country had its own central bank then there functionalities were either removed or completely minimized. This will in fact have a direct impact on the entire entire region. The cost of having a single central bank comes at the cost of having to do away with some of the functionalities that most central banks had. Having a common central bank would need one central bank governor, this position might bring a lot of controversies hence spoil the good economic stability that the countries have. Differences might also arise from the unity of the central banks; this will hence cause a lot of tension among the member states leading to economic instability which did not exist before. Even though having a common central bank has a lot of benefits, there are costs that come with it. This leads to the fulfillment of this economic principle. The third economic principle is that rational people think at the margin. This means that any rational person will have to think at the benefits of one particular action against its disadvantages. If the positive effects of the actions are much more than the disadvantages, then the rational person will continue with the deal. However in the case where the benefits do not exceed the disadvantages, then the rational person does not go ahead with the deal. As earlier discussed, every economic action has its cost and so does the signing of the Maastricht treaty in 1992. Before the signing of this treaty, the different European countries only existed as neighbors. However after several governments economist sat down and saw that there was a much better advantage being united as the European Union than as single economies, they came together and signed the treaty. This has really helped European countries to have a big growth (Perman, 2009). The treaty had its disadvantages but after weighing out the advantages from the disadvantages, the economist felt that Europe was much better working together than alone. As a result of this decision, European countries have enjoyed a lot of trade among themselves and this has also benefited other countries that are not within the union. Business cycles have improved due to this brilliant decision. This points us to the third principle of economics that before any decision is made a lot of research is needed so that one may understand the benefits and disadvantages of the different actions. Economic indicators There are prevalent macroeconomic indicators used in this article. GDP and CPI are the most obvious ones that can be easily seen from the article. They are the endogenous variables while the interest rates are the exogenous variable used in the research study. The indices are used to compare the relationship that the institutional changes have on the economy (Fetter, 2009). This means that the research compared these indices before the implementation of the institutional changes and after the institutional changes had been implemented. Gross domestic product or simply the GDP, is the most commonly used indicator that is used to show gauging the position of a countries economy. This indicator represents the total value in dollars of the goods that a particular country produces within a specified period of time. Most economists argue that the GDP represent the size and position of the economy. The GDP group of a particular country is usually compared to the GDP of the previous years. This is then expressed in terms of percentage. For example a 3% increase in GDP will mean that the economy rose by 3% compared to that of the previous year. The GDP can be measured by summing up the overall goods that a particular country produced within a year or it can be calculated by summing up the total amount of money that was used to purchase goods over a particular period of time. From the article, a study of the GDP means a lot it is easier to show the economic impact that the institutional changes have brought to the country. If the GDP has increased with a larger margin compared to past years then it shows that the changes have positive influence on the economy. However if the GDP does not increase or it increases with a lower percentage compared to previous growth, then it shows that there is a negative influence of the changes on the people (Anderson, 2010). The consumer price index or simply the CPI is another economic indicator used during the research. The CPI is the average amount of money used by urban dwellers to purchase amount of goods and services. This figure is reached at after a thorough analysis of data collected in specific areas and working out the expected mean. CPI is very important in measuring the inflation rates as well as determining the living standards of people within a location. From the research, CPI of different major cities was calculated prior to the institutional changes and after the changes had been affected. In an event that the CPI increase after the changes, then it shows that the changes had a negative impact on the cost of life. However if these figures reduce then it shows that the changes were positive on the general life of the people living around the city. It is for this reason that the CPI was used to measure the overall effect of the institutional changes (Jackson, 2008). Interest rate is the amount charged by a lender as a percentage of the principal amount given to the borrower. These rates are normally noted on a yearly base as the annual percentage rates. In most cases, the interest rates are determined by the central bank of a given country. Low risk persons are usually charged a lower interest rate than a higher risk person. These rates keep changing with change in the economy of a country. The interest rate could b a clear I central bank. In the research, the interest rates were very important especially after the coming up of the common central bank. If the interest rates were increased, then it showed that the changes were not positive. However reduced interest rates would indicate that the changes had a positive impact on the people (Yang, 2009). Outcome expectations The most evident outcome that may take place due to this research study is that an alternate Avenue of fluctuations in business cycles shall be explored. Most of the research that has investigated the linkage of institutional changes with business cycle fluctuation has concluded that there is direct and positive relationship between the two. However, present study contradicts the findings of Artist and Zhang (1997) and Gertler and Comin(2006). The study can also help diffuse the debate that countries that are facing debt crisis, such as Greece, Spain, and Italy shall consider to abolish the use of Euro currency. The first institutional change was that of signing the Maastricht treaty. The composite indicator of most of the Euro and non-Euro economies reveals that convergence in cyclic trends had started taking place before Maastricht treaty. This convergence in fluctuations of business cycles was traced back to 1980s. These institutional changes did take place as an outcome of decreased trade barriers, monetary convergence, and the need to conduct the transactions in a currency that did not create barriers to trade and manufacturing. Large monetary events were observed to have low impact on nature and framework of instabilities. Academic and financial industry researchers of countries such as Greece and Spain can learn from the study to thoroughly investigate the impact of monetary events. Group of countries that are considering currency unification may benefit from current study to explore multiple angles of monetary unification. The data of industrial production, consumption, and gross capital formation of Germany was much better than other Euro economies (Douglas, 2010). This implies that improving fiscal discipline might be a better option for highly indebted Euro economies rather than abolishing Euro as currency. Conclusion From the article, it is evident that the institutional changes had a lot of positive impact on the general business cycle of the entire region. This can be seen by the different economic indicators such as the reduced interest rates, the increased GDP of the European countries also show that the economy of the individual countries were experiencing a major positive change. The CPI also indicates that the life conditions of people in the urban areas have also improved. References Artis, M. & Zhang, W. (1997). International Business Cycles and the ERM: is there a European Business Cycle?International Journal of Finance and Economics, 2(1), 1-16. Consumer price index. (2012). United States Department of Labor, Retrieved from Bureau of Labor Statistics website: http://www.bls.gov/cpi/home.htm Gertler, M. & Comin, D.(2006). Medium-Term Business Cycles. American Economic Review, 96(3), 523-551. Taussig, F.W. (2007). Principles of Economics. Reprint ed. New York: Cosimo, Inc. Taylor, J. &Weerapana, A. (2008). Principles of Macroeconomics. 5th ed. U.S.A: Cengage Learning. Douglas, E. (2010). Economics of marketing. New York: Harper & Row. Jackson, J. (2008). Economic principles. Boston: McGraw-Hill. Fetter, F. A. (2009). Economic principles. New York: Century Co. Eichner, A. S. (2011). The megacorp and oligopoly: Micro foundations of macro dynamics. Cambridge [Eng.: Cambridge University Press. Perman, R., & Scouller, J. (2009). Business economics. Oxford: Oxford University Press. Anderson, D. A., & Princeton Review (Firm). (2010). Cracking the AP economics macro & micro exams. New York: Random House. Yang, X., & Liu, W.-M. (2009). Inframarginal economics. Singapore: World Scientific Pub., Co. Anderson, D. (2010). Cracking the AP economics exam (micro & macro). New York: Random House. Katona, G., Morgan, J. N., & Behavioral economics. (1980). Essays on behavioral economics. Ann Arbor, Mich: Survey Research Center, Institute for Social Research, University of Michigan. Anderson, D. A., & Princeton Review (Firm). (2012). Cracking the AP economics macro & micro exams. New York: Random House. Read More