Analysis of Portugal Economic - Case Study Example

PORTUGAL ECONOMIC ANALYTICAL REPORT Students Name: Affiliation: Department Course: Date: Introduction Portugal, a member of the European Union, has a mixed nature economy and substantively functions as a high-income country. Most of the imports in the country comes from the EU and largely from Spain, Germany, France and the United Kingdom[Fer15]. The exports also involve other EU member states. The currency for the country is the euro and has been a member of the Eurozone since it was incepted. AGGREGATE DEMAND AND SUPPLY The aggregate demand substantiates the overall demand for goods and services in the entire economy. It substantiates a macroeconomic term that heightens a relationship between everything purchased and sold within the country. Thus, the aggregate demand equals the Gross Domestic Product in the economy GDP substantiates a nation total economic output for every year. It's equivalent to what is being spent in the economy of the country. The formula to calculate the elements of Aggregate Demand is AD (GDP) = C + I + G + X. That stands for: Y (GDP) = Consumption + Investment + Government + X (net exports, or exports minus imports.) Explanation of the components of GDP i. Personal Consumption Expenditures. The consumers spend on what is produced and includes goods and services. Goods are subdivided into durable goods that include automobiles and furniture while non-durable goods comprise of food, clothing and fuel. Services produce 74% of the Portuguese economy and provide 65% of jobs to the working population. ii. Business Investment Business investment substantiates the purchases that the companies make to produce the consumer goods. However, where a purchase is made to replace an existing item, it does not add up to the GDP[Goo131]. Thus, an increase in private inventory makes a contribution to the GDP. A decrease in orders in inventory means that businesses are experiencing a fall in demand. As the inventories build up, companies cut back their production and if it continues for long people eventually lose their jobs. iii. Government Spending Government spending articulates all government consumption, investments and transfers payment to satisfy the collective needs of the nation. The government spending is made of final consumption and the gross capital formation. It is financed through borrowing, seigniorage and taxes. The spending for the Portuguese government is in pension, health care, education, defense, and welfare. iv. Net Exports of goods and services Imports and exports have an opposite effect on the GDP because exports add while imports subtract. The Portuguese economy represents a positive net exports because the exports exceed imports. Source: www.ine.pt UNEMPLOYMENT Unemployment describes phenomena where people who do not have jobs are actively pursuing a job in the last month and are currently available for work. Also, those individuals who have been temporarily laid off and are waiting to be called back fall under this concept. The unemployment is used by the Portuguese government to gauge the health of the economy. If the rate of unemployment gets too high at around 6%, the government will try to stimulate the economy and create jobs. Causes of unemployment Unemployment is identified when there is a slowdown in the economy and business are forced to cut cost by reducing payroll expenses[Por13]. This is accentuated by the 2008 financial crisis that created the worst unemployment and the highest unemployment rate of 17.7% Consequences of unemployment The consequences of unemployment to an individual is financially and emotionally destructive. It is also harmful when it rise above 6% because when many people are unemployed, one of the key driver to growth that is consumer spending is lost. This is because people have lesser amounts to spend and if it continues it may cause a recession or even depression. Unemployment rate= Unemployed Civilian Labor Force/ Number of people in civilian labor force Data reference period Unemployment rate (Series 2011 - %) by Sex, Age group and Highest completed level of education ; Annual (1) Sex MF M F Age group Total Total % % % 2015 12.4   12.2   12.7   2014 13.9   13.5   14.3   2013 16.2   16   16.4   2012 15.5   15.6   15.5   2011 12.7   12.3   13   Source: www.ine.pt There are different types of unemployment and comprise of; a) Cyclical unemployment which is caused by the contraction phase of the business cycle. It arises when the demand for goods and services fall forcing businesses to lay off workers to cut on costs. b) Frictional unemployment arises when workers leave their jobs have not yet found new ones. It also occurs when students look for their first job or when workers are laid off due to business-specific reasons like the closure of a plant. c) Structural unemployment arises where the shift in the economy creates a mismatch between the skills that employees possess and the skills that are required by the employer. d) Natural unemployment accentuates there will always be some level of unemployment even if the economy is healthy. The level of natural unemployment is 4%, and frictional and structural unemployment causes it. INFLATION Inflation accentuates the rise in the prices of goods and services over time. Inflation decreases the purchasing power of each unit of the currency[Asc141]. The inflation in Portugal substantively reduces the value of the euro. There are five types of inflation, and they include; a. Hyperinflation- this is the worst type of inflation and is occurs when prices rise by over 50 percent a month. It is a rear type of inflation in Portugal because massive military spending causes it. b. Asset inflation articulates an increase in the price of an asset, and it occurs nearly all the times. c. Creeping inflation occurs when prices rise by 3% or less a year. It is relatively common and occurs when the economy is doing well. d. Walking inflation occurs when prices rise by 3%-10% per year which cause people to stock up now to avoid higher prices in future. e. Galloping inflation arises when price increase by over 10% a year and it can destabilize an economy, drive out foreign investors or cause a government to be toppled. This inflation is brought about by the exchange rate fluctuations. Inflation is caused by the following factors a. Demand-pull inflation that arises when demand for commodities exceed supplies b. Cost-push Inflation occurs when the supply of goods or services are restricted while the demand for the same goods and services remain the same. c. The oversupply of supply of currency causes inflation. This occurs because there is too much capital that is chasing goods and services. A too expansive monetary or fiscal policy creates too much liquidity hence inflation. Portugal, Indices and Annual Average Rates of Change Reference year 2012 = 100 Years All items Rate of Change All items Rate of Change excl. housing % CPI %           2008 93.421 2.56 93.354 2.59           2009 92.502 -0.98 92.574 -0.83           2010 93.783 1.38 93.872 1.40           2011 97.281 3.73 97.302 3.65           2012 100.000 2.80 100.000 2.77           2013 100.250 0.25 100.274 0.27           2014 99.848 -0.40 99.996 -0.28           2015 100.313 0.47 100.483 0.49           Source: www.ine.pt MONEY, BANKING AND INTEREST RATES Money substantiates any commodity or token that is accepted as a means of payment for goods and services. Money has three primary functions; A medium of exchange. This substantiates an object that is accepted in the exchange of goods and services. In the absence of money, people exchange goods and services directly with the concept referred to as barter trade. However, the system requires the presence of double coincidence which is rare. The measure of money in Portugal are M1 and M2. M1 is made up of the currency that is outside the banks and the demand deposits at banks that individuals and businesses own. M2 represents M1 together with items like personal savings deposited in banks and all other deposits that are in the financial institutions. How banks in Portugal create money. When a bank receives deposit of currency, the reserves increased by the amount that has been deposited, but the required reserve increases by a fraction of the amount deposited. When the bank has excess reserves, it issues it as loans[Arg131]. For a bank to have excess reserves, the actual reserves are greater than the required reserves. The deposit multiplier accentuates to the amount that increases the reserves of the bank, and it is multiplied to calculate the increase in the bank deposits. Deposit Multiplier = 1/ required reserve ratio The demand of money The quantity of money that the citizens plan to hold depends on in the following factors The price levels. An increase in the price levels will result to an increase in the nominal quantity of money, but the real quantity of money that is held is not changed. The quantity of nominal money that is demanded is proportional to the price levels. For example, a 10 percent increase in the price levels increases the quantity of nominal money that is demanded by 10 percent. Interest rate. It substantiates the opportunity cost of being in possession of wealth in the form of money rather than assets that bear interest. Real GDP. A rise in real GDP led to an increase in the volume of expenditure this enhances the quantity of real money that is expected to be held by citizens. Financial innovation. This factor lowers the costs incurred in switching between money and interest-bearing assets thus decreasing the quantity of money citizens plan to hold The supply of money Banco de Portugal determines the quantity of money supplied and on any given day the quantity is fixed. The supply of money exhibits a vertical curve at the quantity of money supplied. Interest rate Interest rate heightens a percentage yield that accrues from a bond or stock held. The price of a bond and the rate of interest are usually inversely related. A fall in the price of a bond will lead to an increase in the rate of interest of the bond, and vice versa is also true. The money market equilibrium will determine the interest rate at a particular time. Factors that affect the interest rates Exchange rate. It describes the price at which the euro exchanges with other currencies. Nominal and real interest. The nominal interest rate is expressed as a percentage of return from an asset represented in money terms while the real interest accentuates to a percentage of return on an asset on what money will buy. Real interest rate = Nominal interest rate – Inflation rate DEMAND SIDE POLICY The aim of the demand side policy is to substantively increase the aggregate demand. However, if the trend rate of growth is close or full capacity, a further increase in AD results to inflation. Source: www.economicshelp.org The following tools are used as demand side policies Monetary policy. This tool is the most common in influencing the economic activity. To boost the GDP or Aggregate demand, the Banco de Portugal can cut the interest rates. Use of quantitative easing. This method articulates the increase in the supply of money and buying back of bonds to keep bond rates low. Evidence from 2009-2012 economic crisis accentuated failure to use it would have led to a greater recession. Fiscal policy- the government uses this to boost demand by cutting tax and increasing the spending by government. SUPPLY SIDE POLICY These policies are used by the government to increase productivity and efficiency to the market. Source: www.economicshelp.org The following tools are used as supply side policies; Lower income taxes. This perspective argues that lower income tax can substantively boost the incentive to work and increase the supply of labor. This is possible if the income taxes are excessive thus encouraging people to work more. Flexible labor market. Labor markets that are highly regulated may discourage firms from setting up and employing workers. Privatization and deregulation. Privatizing government-owned industries increases efficiency because they will have greater profit incentives in cutting costs and also boosts productivity. BALANCE OF PAYMENT The balance of payment substantiates that the value of a currency is based on the balance of payment. The currency of a country appreciates when the balance of payment is positive. The balance of payment adds up the balances of the current account and the capital account[Bur121]. The current account is further divided to trade balance of goods, the trade balance of services, investment income, and current transfers. The capital account is made of transactions in financial assets and liabilities. Source: www.ine.pt TRADE AND GLOBALIZATION International trade has over the past several decades has substantively been the main cause for globalization. The contextual description of globalization accentuates the growth in interdependence among countries thus increasing the integration of trade, finance, people and ideas to one global market. It has been driven by two main factors that include technological advances and the increased liberalization of trade and the capital markets. Portugal exports and imports its products mainly in the Eurozone guided by the conditions set up by the European Union Source: www.ine.pt Conclusion The paper substantively analyzes the macroeconomics concepts with Portugal as a case study. Portugal, a member of the European Union, has a mixed nature economy and substantively functions as a high-income country. Most of the imports in the country comes from the EU and largely from Spain, Germany, France and the United Kingdom. The concept on microeconomics thus heighten a measure of determining the Portuguese economy. Bibliography Fer15: , (Ferreira-Pereira, 2015), Goo131: , (Goodwin, 2013), Por13: , (Portugal, 2013), Asc141: , (Ascari, 2014), Arg131: , (Argy, 2013), Bur121: , (Burda, 2012), Read More