Macroeconomic Principle: Recession - Research Paper Example

?First M. Number Macroeconomic Principle: Recession Introduction The recent economic report of Pylas and Rising(2013) is related to one of the macroeconomic principles -- recession. The report announced the unexpected drop of Germany’s economic output/income. Also, economists forecasted that the contraction is not permanent; however, the abrupt shifting has worsened the EU recession (Pylas & Rising, 2013). In world market, this may result to the withdrawal of investments and collapse in confidence. For instance, countries worldwide may withdraw their investments in Germany, as they believed that the latter’s economic frame is unstable, and would just compromise their own problem. According to Wiegand (2009), recession takes place when a country’s gross domestic product (GDP) “goes down for six months or more” (p. 18). Also, when recession transpires, a series of economic problems will arise, including unemployment, inflation, adjustments of investments, additional credits, declining values for goods and services, cutting out exports, higher interest rates, and dropping of currency. These problems influence the economic performance of the world market, particularly the European Union (EU). The purpose of this paper is to analyze a recent economic report in relation to recession, and its application in the outside world. Recession and its Problems The phenomenon of recession occurs when the economic development of the country decreases to “less than three percent” (Wiegand, 2009, p. 19). It has been illustrated that Germany has a GDP contraction rate of 0.6%, “more than the 0.4% expected for the 4th quarter of 2012” (Pylas & Rising, 2013); the figure shows that the country is nearly in recession, and will be into it if the decline will continue in the following year. Unemployment. In case of Germany’s economic contraction, it is then projected that several establishments will reduce their output due to a lesser demand; hence, the level of unemployment will increase (Pylas & Rising, 2013). Also, the shutting down of businesses will lead to redundancy; in fact, this has been one of the serious problems in EU as shown in figure 1 (“Taking Europe’s Pulse,” 2013). Figure 1: Unemployment Rate in the EU Source: “Taking Europe’s Pulse,” 2013 The figure above shows that the unemployment rate of EU members, such as Greece, Spain, Portugal, and many more, is very high since 2012 compared to other members like Germany. Inflation. Germany’s exporters are also concerned on the set-up that their product became “less competitive in the international marketplace” (Pylas & Rising, 2013). According to Wiegand (2009), in case of inflation, the value of money decreases over time while the “price of commodities increases” (p. 23). The declining economic performance of Germany would conceive inflation in terms of purchasing value. Otherwise stated, the amount of money spent on buying a particular good does not maintain its value as times passes because the price of commodities has been increased. For instance, a 10-euro bill in the year 2000 could buy a lot of stuff compared to a 10-euro bill of today. Hence, inflation brings difficulty to consumers in buying their needs and wants, which will result to merchandise unsold. While inflation is the increase in prices, its opposite--deflation, also brings harm to the economy. Deflation happens when the prices of goods and services plummeted consistently and creates surplus of supply and lesser demand (Wiegand, 2009, p. 24). Foreign exchange market. Several exchange rates are being established in different countries depending on recent trading performances among countries. Their currencies depict the stability of their economic activity. The stability of euro (€) is one of the primary issues that EU members would be highly concerned of considering that they are using the euro as their “single currency” (“One Currency,” n.d.). Frequently, the idea of exchange rates is very confusing; nevertheless, the higher the exchange rate is, the more stable is the country or region’s economy. Hence, when the exchange rate of euro increases, this would mean that the claim for foreign currencies decreases. Moreover, the increase signifies that the economic administration of EU or Germany, for instance, is well managed. This exchange rate varies from day-to-day basis because transactions and negotiations are made every day. Analysis Macroeconomics is the application of economic concepts as a whole or a group, which regards the performance of different sectors, such as “consumer sector, household sector, and business sector” (Boyes & Melvin, 2011, p. 8). In the consumer sector, the activity made is being evaluated to emphasize its impact towards the economy, and so is the purchase in the household sector whether it helps in raising economic development or its remains unperturbed. The business sector played the major role in the improvement of economy because it received the higher amount of income. The German economy that is reported to have a declining GDP has a gradual influence on worldwide economies, particularly to EU economies. Germany’s recent economic performance is a discouragement and a drawback to the eurozone considering that it is one of their biggest markets and economic powerhouse (Pylas & Rising, 2013). It has been projected that if the country would not record a positive economic performance in the early months of the following year, Germany will join other EU countries in a recessionary status or in great depression. In fact, it is important to note that some elements of recession have been evident in their declining GDP; thus, it is important to analyze the GDP components that have been significant in the report. Net export of goods and services. Based on the report, products produced and traded by German exporters were not fully sold out; hence, there is a noticeable decrease in the demand of their exported products. This situation is associated to the country’s weak and unfavorable economic performance, which has been alarming to current and potential investors. Unfortunately, most of them chose not to take the risk, and so “exporters are struggling” (Pylas & Rising, 2013). This incident may result to the closing of manufacturing firms and reducing market related activities in the German market. Consumption. Changes in consumerism shaped the market performance and national output of Germany. This consumerism practices are fueled by the economic situation of a certain country. Inflation, for once, deeply transforms the projected market of Germany. If the prices of the products/services from the country are higher than the average market price, then it is expected that consumers would choose not to buy them. Investment. Local and international investments are also affected in the event of recession. German investors, who are short of funds because of recession, have to adjust investments and in the process changed their target market. Germany, which is nearly in deep recession, may arrange to acquire a debt from an international financial institution, such as the European Central Bank (Pylas & Rising, 2013). Such action is made to help in recovering the financial losses incurred by the economic downturn; however, this will also mean additional monetary commitments. Countries that are much indebted with other countries or financial institutions have difficulty to regain economic stability. Usually, international debts are long-term, which are guided by the interest rates imposed by the creditor. The interest rates are being issued on government bonds for the usage of money. Hence, countries, which borrow funds from an international entity, are prescribed to follow interest rates. The compliance of payments generates satisfactory economic stability because it is an indication that the country is recovering from its economic downturn, as shown in figure 2 (“The Euro-zone Crisis,” 2013). Figure 2: Government-bond Markets Source: “The Euro-zone Crisis,” 2013 The above data (left-hand chart) suggest that Spain is trying to recover from its pitch on July 2012 caused by the distress over split of euro while several countries (right-hand chart) are also doing their best to pay the loans they acquired from an international creditor (“The Euro-zone Crisis,” 2013). Therefore, net export, consumption, and investments are among the GDP components that have significant impact on Germany’s recent economic performance. As an economic powerhouse, Germany must maintain its economic stability to rectify the needs of its own and maintain a balance trading in the region. Skepticism is a normal reaction from foreign investors as they recognized the current crisis in Germany. In view of this, it is expected that withdrawals of foreign investments will be made because they might be thinking that the German economy will not recover from contraction; hence, they would not dare to gamble their money. Nevertheless, the apprehension caused by recession would only worsen the economic situation in Germany, for it needs more investments and not skeptical investors in order to alleviate its present state. Moreover, the removal of investments from foreign countries manifests a drop in national income or GDP. Thus, recession would become a hindrance to its economic development as it inflicts troubles like unemployment, cutting of investments, and inflation, which oftentimes result to another set of problems. If these factors are not addressed accordingly, a great depression might take place. Remedy: Increase in Taxes In general, the EU countries are aggressively looking for remedies to fight recession. One of the remedies, policymakers think would be relevant to solve the problem, is to increase taxes (Pylas & Rising, 2013). According to Mankiw (2009), “the government during recession…would have to raise taxes or cut spending at a time of high unemployment” (p. 535). Hence, EU countries that are affected by recession, particularly Germany, are expected to increase their taxes to generate money or income in order to finance their expenses. In other words, the collected taxes will be used to realize its proposition. This remedy has already been practiced in Greece and Spain (Pylas & Rising, 2013). For this reason, the citizens once again absorbed the burden brought forth by the recession. Conclusion Overall, understanding of macroeconomic concept’s application, such as recession, is very relevant to the global market as it opens the view of economics succession among countries. Germany, which is nearly in recession, should generate more investments and minimize financial drawings. Also, it must aim to maximize its national income/output by stretching its net export, consumption, and investment. The key to maintain economic progress is to dispense its force on different areas. For investment, Germany should not focus solely on EU countries; instead, it should distribute its investments outside the eurozone to prevent economic downfall at the same time. For the domestic industry, a constant increase on prices of goods and services should be avoided to combat oversupply. It is important to develop remedies like increasing taxes, which will be used to combat recession in order to address problems like high unemployment and high inflation. References Boyes, W., & Melvin. M. (2011). Macroeconomics (8th ed.). Mason, OH: South- Western Cengage Learning. Mankiw, G. (2009). Principles of macroeconomics (5th ed.). Mason, OH: South- Western Cengage Learning. One currency for one Europe. (n.d.). Retrieved from http://ec.europa.eu/euro/index_en.html Pylas, P., & Rising, D. (2013). Eurozone recession deepens as Germany falters. Retrieved from http://www.cortezjournal.com/article/20130214/ API/1302140644/Eurozone-recession-deepens-as-Germany-falters Taking Europe’s pulse. (2013). Retrieved from http://www.economist.com/blogs/graphicdetail/2013/02/european-economy-guide The Euro-zone crisis: Time to celebrate? (2013). Retrieved from http://www.economist.com/news/finance-and-economics/21569727-government-bond-markets-peripheral-countries-are-soaring-time-celebrate Wiegand, S. (2009). Lessons from the great depression for dummies (2nd ed.). Hoboken, NJ: Wiley Publishing. Read More