Excel Spreadsheet on Italian Government - Term Paper Example

Macroeconomics In the recent times, it is necessary to motivate a study of the statistical correlation between the correlation relationship between government consumption and the GDP and between government stock yield and the current GDP. Since the times of Friedman and Schwartz, this stylist fact has been considered among the vital in macroeconomics and in making macroeconomics policies (Miles and Andrew, 89). Gross domestic product gives a clue on how the well a country is doing. That is, standard of living and wellbeing are partially a matter of financial and monetary wealth. Increased production of goods and services in an economy does benefit the standards of living and wellbeing of the citizens in some ways but not always. This is because GDP does not give a clear answer of essential questions such as whether the people are consumption much on the wrong things, or whether people have better quality consumption or whether the savings are too little (Miles and Andrew,56). Additionally, the GDP does not measure elements of wellbeing that are not related to government consumption and financial income: longevity, leisure time, social equality, capabilities, quality of education and many others. This paper tries to analyze the correlation relationship that exists between GDP and government consumption, and between GDP and government bond yield. The GDP and government consumption relationship appears to be in the sense that even though Gross Domestic Product is calculated using numerous measures, government consumption on its part is the single most vital component. In most countries the government consumption exceeds 50% of the GDP while in some this could go beyond 70%. In Italy for instance, government consumption is considered to be the main statistic on which it relies while calculating the GDP. Several studies reveal that the most important relationship between GDP and government consumption is that an increase in the level of consumption results to an increase in the level of the GDP (Miles and Scott, 13). Government consumption is a broad Macroeconomic element hence it is necessary to divide into several components in order to get the real picture of its correlation relationship with the GDP. The consumption of durable goods refers to nonperishable goods and goods that last for a period of more than three years, while on the other hand nondurable goods are the goods consumed for perishable goods or other goods that generally last for less than one year. A country’s treasure is the most impacted area within the economy when taking about the bond market (Schaefer, 65). Most economists argue that the most appropriate way in trying to understand the relationship between the bonds and the economy is to think about interest rates as being the cost of money (Taylor, 21). A stronger economy is characterized by high demand of money because greater activity means that there is more of need for cash that can help in financing projects. Theoretically, stronger economic growth makes inflation likely. The Italy Federal reserve is more likely to fight inflation through boosting the interest rates (Miles and Andrew, 77). A projected increase in the interest rates could mean long-term rates could be expected to follow and the vice versa (Schaefer, 112). While all section within the bond market takes their cue for treasure in an ultimate way, government bonds are seen as being the safest investment globally. The long term relationship between bond yields and macroeconomic fundamentals can break down in the short run, particularly during financial stress periods. For instance, after the 2007-08 global crises and despite the pilling up of general government debt in the USA, the United States bonds yields have been trending downwards (Schaefer, 90). On the other hand, borrowing costs in some European countries such as Spain, despite a relatively lower initial level of general debt, have continuously exceeded those of more highly indebted nations such as the UK (Schaefer, 134). In regards to this behavior, it can be concluded that there is need to differentiate between short-term and long run determinant of borrowing costs. It is therefore clear that identifying a consistent effect of fiscal imbalances on bonds yield requires a more complete econometric exercise that controls a wide range of other influences on yields (Schaefer, 33). Analyzing the general economy (macroeconomic theory) Economy is always considered complex and therefore each economic variables relates to each in one way or the other for smooth working of the economy (Taylor, 16). GDP and consumption affects the general pattern of the economy and it is therefore a fact to say that changes in GDP can result to changes in the exchange rates and interest rates. This relationship means that any undue changes in the level of government consumption in either way can result to a fall or an increase of the country’s GDP. An increase in the GDP can be projected to mean a strong economic growth and high consumer preferences (Taylor, 88). A decline in the real GDP can be taken as an indication of a downturn in the market caused by a decline in the demands for goods and services. The governments attempt to stabilize the economy through manipulation of the fiscal and monetary policies. Full employment, equitable balance of payment and controlled inflation define the stable economy (Miles and Andrew, 99). Monetary policies relates to financial markets and the supply of money, credits and other financial assets. On the other side, fiscal policies relates to expenditures and taxes. Monetary policies such as increasing money supply in the economy are mainly implemented by the Central bank of a country. The government of a nation is therefore mostly responsible for the implementation of fiscal policies. Interest rate is one of the vital determinants in the foreign exchange market. As the institutions set the rates of interest, central bank of a country is therefore the most prominent actors (Taylor, 20). The flows of investments are determined and influenced by interest rates. In view of the fact that currencies are the representations of the economy of a nation, difference in the rate of interest impact the relative worth of currencies with regards to another. A change in the interest rates by the central bank causes volatility and movement in the foreign exchange market. Low interest rates encourage investments in the economy because the cost of borrowing will be low. Fiscal and monetary policies are the most vital government tools for managing the economy (Taylor, 145). The IS-LM model provides a framework to study the power of fiscal and monetary policies. According to this model, increases in government consumption, decreases in the taxation rate and a reduction in the short-term interest rates leads to an expansion of the real GDP (Miles and Andrew,111 ). Data and data source In order to determine the correlation relationship that exists between GDP and government consumption, and between GDP and government bond yield, the study will analyze the economic data for Italy. The GDP and government consumption data is sourced from the Italy’s Central Bank statistics and annual publications which are posted on their website. The bond yield results are also sourced from the Central Bank statistics but it also includes data from Bloomberg. This ensured a wider range of data hence a more detailed and precise results. Results Figure 1: government consumption and growth rate Figure 2: bond yield and GDP Analysis Italy’s GDP growth rate has been on the increase since the year 1970. On average, the country has experienced 0.01932 growth rate since 1970-2009. This shows a positive trend that can be attributed to better economic policies that has been adopted by the country. The government consumption share of PPP converted GDP per capita at 2005 constant prices is, on average 6.4798. The level of openness is of great importance in relation to the technological status of the economy. Countries that are open to international trade are more developed in terms of technology than their closed counterparts. Foreign direct investments, absorptive capability, technology spillovers and economic growth are both positively related to the level of openness in an economy (Taylor, 189). Openness of an economy will attract FDI. Most foreign investments will be accompanied with advance technology compared especially in developing countries. This technology will spread across the labor market as the employees need to be trained on how to apply the current technologies in order to be efficient on their work (Miles and Andrew, 190 ). Italy is one of the countries that adopt an open economy that is why it has a strong level of openness with the highest figure being of 56.904 being registered in 2007. Countries that exposes high taxes on towards other trading partners have less trading volume compared to those with less tax restrictions. One of the obstacles to international trade is the trade taxes (Schaefer, 67). Just like individual consumers, countries maximize their utilities. In the case of Italy, the main aim of the Central Bank is to achieve a positive or balanced balance of trade. Therefore, Italy has minimized its imports while at the same time maximizing its exports. To achieve this, the country has encouraged domestic productions while at the same time limiting foreign based imports (Taylor, 66). To limit imports, Italy has imposed some taxes to their trading partners. However, high taxes will discourage their trading partners from trading with them. In a global context; developed economies are the main trading partners of poor or developing countries (Taylor, 115). Developed countries mostly imports raw materials from developing countries in low prices. The developing economies on their side import finished products from these developed countries. Therefore, most of the trading partners of Italy are in the developing state. Globalization has resulted to more open economies and thereby encouraging trade between countries; especially between developed and developing economies (Miles and Andrew, 43). However, developed economies tend to benefit most from globalization than their developing counterparts. This is because most trade unions and international decisions towards international trade are mainly made by these developed economies (Miles and Andrew, 25). Interpretations The scatterplot in relation to bond yields indicates an increase in the net debt of Italy ranging of about 7% of the GDP. However, going by the trend this figure might be a bit lower in 2015. The resultant coefficient estimates are smaller and hence less statistically significant. The results show that the rise in the net debt improper structural fiscal balance may result to a marginal effect on bond yields if all factors are held constant (Schaefer, 102). The above results suggest that government bond yield can temporarily deviate from their long-run equilibrium levels. This can be as a result of market overreaction during the financial stress periods. Figure 1 indicates that consumption increase with an increase in the GDP (Schaefer, 56). The highest growth rate was recorded between the years 1980-1990. It is therefore worth noting that during the same period; the total government spending was also at its level high. But, the regression model does not reveal the same results. The regression model is: Y=1.6862-0.00008x. This shows that an increase in consumption by one unit will decrease the level of GDP by 0.0008 units. The discrepancies that arise between the scatterplot and the regression line can be as a result of other factors that were not captured in the data. However, the basic results as per the scatterplot show that GDP and consumption are positively related. Conclusion Macroeconomics factors are very important in determining the level and performance of the economy. To get the economy moving, the government must borrow and consume appropriately. Therefore consumption and bond yields become very vital variables within the economy. Consumption determines the general demand and supply and hence influences the production of the economy. For this reason, an economy like Italy’s where the rate of consumption is high will have higher demand and high GDP. On the other hand, borrowing forms a very important factor in the economy. Government borrowing will determine the level of interest rate in the economy and hence bond yields. High interest rates leads to high bond yields but at the same time high cost of borrowing. The interest rates do not only affect the government borrowing but the entire economy through the multiplier effect. From the result as depicted in the scatter plot, it is therefore necessary for the government to maintain a good level of borrowing to ensure that it maintains an interest rate that favors a greater economic growth (Lipsey et.al., 78). Work cited Lipsey, Richard G, K A. Chrystal, and Lipsey-Chrystal. Economics. Oxford [u.a.: Oxford Univ. Press, 2007. Print. Miles, David, and Andrew Scott. Macroeconomics: Understanding the Wealth of Nations. Chichester: John Wiley & Sons, 2005. Internet resource. Schaefer, Howard G. International Economic Trend Analysis. Westport, Conn. [u.a.: Quorum Books, 1995. Print. Taylor, John B. Economics. Boston, Mass: Houghton Mifflin, 2008. Print. Taylor, John B. Principles of Microeconomics. Boston: Houghton Mifflin, 2007. Print. Read More