Analytical Research Paper - Essay Example

This paper discusses the macroeconomic issue of the Eurozone recession which adversely affected the countries of Portugal, Italy, Ireland, Greece and Spain (so-called PIIGS) due to fiscal issues. Discussion Economics is a Greek term which literally means the administration or management of a household. It is a social science that studies the production, distribution, and consumption of the various goods and services within a country and also among nations. It came about due to the Industrial Revolution that produced the new economic system of capitalism which replaced old order of feudalism (Sherman, 2006, p. 67). In this new system, wealth (profits) is now created out of invested capital in entrepreneurial ventures as opposed to wealth that was generated by the ownership of vast lands under feudalism.

Economics is generally divided into its two main components; microeconomics is the study of the basic elements in an economy while the other is macroeconomics, which concerns larger issues of an entire economy such as growth, inflation, unemployment, monopolies, oligopolies, recession, depression, and fiscal and monetary policies. Economists broadly define a recession as two (2) successive quarters of economic decline based on the real gross domestic product or GDP of the country. Recession is a problem on a macroeconomic scale because it affects general employment in two ways: those who work lose their jobs while those seeking work cannot find meaningful employment, which in turn will cause a deterioration in the overall standard of living of the citizenry.

Businesses lay off people as there is excess production capacity resulting from a weak or non-existent demand. Economic growth is stalled or stunted which makes business reluctant to hire new or additional people. The unemployment results in reduced income taxes while putting pressure on government social services as revenues evaporate, making the balancing of national budgets very difficult to do. It will result in a fiscal deficit, like the dreaded “fiscal cliff” in America (a $600 billion shortfall).

The significance of this problem is it can result into social chaos and political instability as people and governments scramble to find ways to re-start economic growth but the options are often limited in such a dire situation. If the government tries to reduce expenditures because of a decline in tax revenues (both from individual and business taxes) such as laying off government workers, cutting on social services like education, health care, infrastructure projects and others, people will complain and go out in the streets to demonstrate against austerity measures, which in turn will cause a political crisis that will destabilize a country and cause further problems.

The United States of America uses other economic indicators besides unemployment and a rise in excess capacity, such as industrial activity, real incomes, wholesale prices and retail consumer sales. The National Bureau of Economic Research (NBER) of the United States uses overall business activities as an indicator, the time when business reaches its peak and starts to decline, as the beginning of a recession