Macroeconomic Indices in the EU - Assignment Example

?Running Head: ABBREVIATED OF YOUR CHOICE (all caps) and Section # of Macro Answer #1 Germany is an open economy, so its economy is affected by international competition and location of its product and factor market. The rate of unemployment in Germany has been around 5.4 percent by end of 2012. This is because the demand for labour is a derived demand and the low demand for German products from its 17 Euro countries. This is because of crisis in other parts of German markets such as Cyprus. (Riecher, 2013) Figure 1: Unemployment Rate in Germany1 Germany has been able to deal with structural changes efficiently as its policy doesn’t include laying off workers rather makes the work shorter hours. So when workers cut off their working hours, the government makes up half of the wages of lost working hours. This is a better alternative than being unemployed. Apart from that there a system known as hour bank where workers put extra hours during good times. So these hours could help to compensate in downturn where less hours is worked. Also the unions and management negotiate together on reducing working hours. (Baker, 2013) According to IMF Inflation in Germany by the end of 2012 was 2.137 percent and is expected by IMF that inflation will average to 1.6 percent in 2013. The economy is growing but is not putting an upward pressure in price. This is because the government is able to control inflation because of its tight monetary policy where it has maintained its currency strong too. (Stefan, 2013) Figure 2: Inflation Rate in Germany2 Answer #2 Germany is a part of European Union so it does not have its own money and can’t use its own monetary policy. It follows the policy that is set by the European Central Bank. Current Interest rate maintained by the European Central Bank is only at 0.5 percent. The interest rate has been kept low in taking account low of inflation and high unemployment in other European countries apart from Germany. This has been done in order to encourage investments and allow liquidity for financial institutions to lend more. However in long term could lead to effects as could lead to inflation as it may happen that the demand may rise quickly going over supply that may lead to inflation and thus more unemployment. So it is important for it to maintain balance in interest rate policy. (Stefan, 2013) Germany fiscal policy shows that’s its revenue as by IMF data has over the years accounting to 1201.38 billion expected in 2013 that is 44.372 percentage of the GDP. Its government expenditure as percentage of GDP amounts to 45.005 percent in 2012 and 44.703 percent expected in 2013. Government’s high share in expenditure is having negative effect on growth rate as it is not giving a room for private investments which has been low around 17.219 percent of GDP in 2012 and expected 17.369 percent in 2013. Low investment means low domestic demand for goods and services which needs to be created by the government. Also the tax rate in Germany on individuals income is progressive, higher the income, higher the tax rate which ranges around 14 to 45 percent on individuals income. Effective corporate tax rate is around 30 to 33 percent. It needs to make sure to reduce taxes in order to encourage more growth and investment in the economy. (Randow, 2013) Answer #3 Germany is the power house of industrial base and world’s second largest exporter. One policy Germans adopted was not to borrow money rather they focused to live with their own means as taking debt meant paying back with huge interest costs. They consider taking loan as doing something wrong and feel guilty for it. Germany made its labour market strong in 2003 when it came up with fundamental labour market reform. The government maintained good relations with labour unions in order to easily negotiate on labour wages. At same time workers kept working hours low keeping in mind it was better than to getting unemployed. This helped the economy to flexible in labour market where it could respond to structural changes in the economy. At same time government supported by paying a part of lost working hours pay. (Browne, 2012) Germany has advantage in production of industrial goods and hence focuses on exporting them. It is connected to all European markets and is also finding other emerging markets outside the Euro zone. They have managed to keep the keep the rate of unemployment relatively low at historic levels because of their labour market policies. Germany is home to one of the largest companies in the world such as Seimens group, BMW group, Volkswagen group etc. Answer #4 As Germany is part of the European Union, it has a common currency as to other European countries. Its current account position shows surplus because of strong industrial base as it has surplus of around $238.496 billion in 2012 and expected of $219.208 billion in 2013. Current account balance is 7.013 percentage of GDP in 2012. Germany has a positive current account balance over the years which show that there is demand for German industrial goods in foreign markets as it has even found markets outside the euro zone. The demand for German goods pushes up the price of Euro; currently the Pound Euro exchange rate is trading at 1.8859 GBP/EUR.Germany’s major export is composed of automobiles and its automobiles market dominates around 90 percent of world market including Mercedes- Benz and Porche. Its primary imports are chemicals, machinery, foodstuff and textiles. Also its net debt has been around $1554.231 billion by end of year 2012 that is 51.67 percent of its GDP. This is a high figure and Germany needs to pay back all its debt in order to avoid any downturn in the economy in the future as all economies are connected globally. Figure 3: Current Account as percentage of GDP3 References Baker, D (2013) Reducing unemployment: Lessons from Germany from http://www.aljazeera.com/indepth/opinion/2013/04/20134193422249557.html Bloomberg. German Unemployment Rose Less Than Forecast in December from http://www.bloomberg.com/news/2013-01-03/german-unemployment-rose-less-than-forecast-in-december.html Browne, M. Can America Emulate Germany's Economic Success? From http://www.huffingtonpost.com/matt-browne/can-america-emulate-germa_b_1184104.html Fernando,V (2010) The Secret To Germany's Success Is That It Played Right Into China's 'Concubine Economy' from http://articles.businessinsider.com/2010-08-30/markets/30052739_1_german-companies-joint-ventures-chinese-companies#ixzz2SjnPDwE1 IMF (2013) www.imf.org Riecher, S. (2013) German Inflation Probably Slowed to Two-Year Low in March Reuters (2013) ECB's Asmussen warns about risks of low interest rates from http://www.reuters.com/article/2013/05/07/us-ecb-asmussen-idUSBRE9460S420130507 Riecher, S., Black,J (2013) German Unemployment Unexpectedly Rises Amid Euro Crisis from http://www.bloomberg.com/news/2013-03-28/german-unemployment-unexpectedly-rises-amid-euro-crisis.html Randow, J., Totaro, L (2013) Draghi Says ECB Ready to Cut Interest Rates Again If Needed from http://www.bloomberg.com/news/2013-05-06/draghi-says-ecb-ready-to-cut-interest-rates-again-if-needed-1-.html Read More