Principles of Economics

Executive Summary of Principles of Economics

The three important macroeconomic variables that are considered to measure the economic performance of the nation are the growth rate of GDP, the rate of inflation, and the rate of unemployment. The aim of this study The aim of the study is to provide a comparative analysis of the economic growth rate in the 4 countries for the period 2006-2018. For the analysis, Group D comprising of Russia, Greece, Spain, and Italy is selected. Moreover, the effect of economic growth on the inflation and unemployment rate is presented in detail.

Table of Contents

Introduction.

Table: Macroeconomic indicators of Russia.

Table: Macroeconomic indicators of Greece.

Table: Macroeconomic indicators of Spain.

Table: Macroeconomic indicators of Italy.

Economic growth of Nations over the period 2006-2018.

Economic growth of Russia.

Economic growth of Greece.

Economic growth in Italy.

Economic growth in Spain.

Relationship between economic growth, inflation, and unemployment rate.

Conclusion.

Reference.

Introduction

Macroeconomics can be understood as the study of the framework as well as the performance of the economy as a whole (Tsai, 2019). It includes all those elements that impact the economic performance of a nation, the three main macroeconomic performance indicators are the GDP growth rate, inflation rate as well as the rate of unemployment. The aim of the study is to provide a comparative analysis of the economic growth rate in the 4 countries for the period 2006-2018. For the analysis, Group D comprising of Russia, Greece, Spain, and Italy is selected. Moreover, the effect of economic growth on the inflation and unemployment rate is presented in detail.

Table: Macroeconomic Indicators of Russia

Year

Nominal GDP (LCU)

Unemployment rate

Inflation rate

GDP growth

2018

104,629,600,000,000.00

4.85%

2.88%

2.54%

2017

91,843,200,000,000.00

5.21%

3.68%

1.83%

2016

85,616,100,000,000.00

5.56%

7.04%

0.19%

2015

83,087,400,000,000.00

5.57%

15.53%

-1.97%

2014

79,030,000,000,000.00

5.16%

7.82%

0.74%

2013

72,985,700,000,000.00

5.46%

6.75%

1.76%

2012

68,103,400,000,000.00

5.44%

5.07%

4.02%

2011

60,114,000,000,000.00

6.54%

8.44%

4.30%

2010

46,308,541,189,900.00

7.37%

6.85%

4.50%

2009

38,807,218,574,800.00

8.30%

11.65%

-7.80%

2008

41,276,849,187,000.00

6.21%

14.11%

5.20%

2007

33,247,513,228,800.00

6.00%

9.01%

8.50%

2006

26,917,201,375,100.00

7.06%

9.67%

8.20%

Source :

Macrotrends (2020a) for GDP growth rate

Macrotrends (2020b) for Inflation rate

Macrotrends (2020c) for the Unemployment rate

World Bank (2020) for Nominal GDP

Table: Macroeconomic Indicators of Greece

Year

Nominal GDP (LCU)

Unemployment rate

Inflation rate

GDP growth

2018

184,713,607,200.00

19.29%

0.63%

1.93%

2017

180,217,594,600.00

21.49%

1.12%

1.51%

2016

176,487,946,700.00

23.54%

-0.83%

-0.19%

2015

177,258,355,900.00

24.90%

-1.74%

-0.44%

2014

178,656,479,400.00

26.49%

-1.31%

0.74%

2013

180,654,276,300.00

27.47%

-0.92%

-3.24%

2012

191,203,907,900.00

24.44%

1.50%

-7.30%

2011

207,028,875,300.00

17.87%

3.33%

-9.13%

2010

226,031,447,200.00

12.71%

4.71%

-5.48%

2009

237,534,181,500.00

9.62%

1.21%

-4.30%

2008

241,990,389,900.00

7.76%

4.15%

-0.34%

2007

232,694,592,700.00

8.40%

2.90%

3.27%

2006

217,861,568,200.00

9.01%

3.20%

5.65%

Source:

Macrotrends (2020d) for GDP growth rate

Macrotrends (2020f) for Inflation rate

Macrotrends (2020e) for the Unemployment rate

World Bank (2020) for Nominal GDP

Table: Macroeconomic Indicators of Spain

Year

Nominal GDP (LCU)

Unemployment rate

Inflation rate

GDP growth

2018

1,202,193,000,000.00

15.26%

1.68%

2.35%

2017

1,161,878,000,000.00

17.22%

1.96%

2.89%

2016

1,113,840,000,000.00

19.64%

-0.20%

3.03%

2015

1,077,590,000,000.00

22.06%

-0.50%

3.84%

2014

1,032,158,000,000.00

24.44%

-0.15%

1.38%

2013

1,020,348,000,000.00

26.09%

1.41%

-1.44%

2012

1,031,099,000,000.00

24.79%

2.45%

-2.96%

2011

1,063,763,000,000.00

21.39%

3.20%

-0.81%

2010

1,072,709,000,000.00

19.86%

1.80%

0.16%

2009

1,069,323,000,000.00

17.86%

-0.29%

-3.76%

2008

1,109,541,000,000.00

11.25%

4.08%

0.89%

2007

1,075,539,000,000.00

8.23%

2.79%

3.60%

2006

1,003,823,000,000.00

8.45%

3.52%

4.10%

Source :

Macrotrends (2020h) for GDP growth rate

Macrotrends (2020f) for Inflation rate

Macrotrends (2020i) for the Unemployment rate

World Bank (2020) for Nominal GDP

Table: Macroeconomic Indicators of Italy

Year

Nominal GDP (LCU)

Unemployment rate

Inflation rate

GDP growth

2018

1,766,168,200,000.00

10.61%

1.14%

0.80%

2017

1,736,592,800,000.00

11.21%

1.23%

1.67%

2016

1,695,786,800,000.00

11.69%

-0.09%

1.29%

2015

1,655,355,000,000.00

11.90%

0.04%

0.78%

2014

1,627,405,600,000.00

12.68%

0.24%

0.00%

2013

1,612,751,300,000.00

12.15%

1.22%

-1.84%

2012

1,624,358,700,000.00

10.66%

3.04%

-2.98%

2011

1,648,755,800,000.00

8.36%

2.78%

0.71%

2010

1,611,279,400,000.00

8.36%

1.53%

1.71%

2009

1,577,255,900,000.00

7.75%

0.77%

-5.28%

2008

1,637,699,400,000.00

6.72%

3.35%

-0.96%

2007

1,614,839,800,000.00

6.08%

1.83%

1.49%

2006

1,552,686,800,000.00

6.78%

2.09%

1.79%

Source :

Macrotrends (2020k) for GDP growth rate

Macrotrends (2020j) for Inflation rate

Macrotrends (2020l) for the Unemployment rate

World Bank (2020) for Nominal GDP

Economic Growth of Nations Over the Period 2006-2018

Economic Growth of Russia

The financial-economic crisis of 2008 impacted most of the countries across the globe. Russia was also impacted by the crisis, the year after 2008, Russia saw a decline in the GDP growth rates. This decline can be attributed to the decrease in Total Factor Productivity as well as degradation of the labor allocation and lesser due to lack of capital inputs (Voskoboynikov, 2017). Moreover, after the year 2008, there was a decline in the information and communication technology capital ‘s contribution to the productivity growth of labor, this in turn, negatively impacted the technological diffusion as a result, the country witnessed stagnation (Voskoboynikov, 2017).In addition to this, the economy witnesses change in the structure of capital services. Before the financial crisis, the country was witnessing positive annual growth which was possible because of the improvements in the machinery and equipment, however, after the crisis, the highest GDP contribution was of the construction sector (Voskoboynikov, 2017).

In the mid of 2014 till the year 2016, Russia witnessed another recession, this was caused by economic as well as geopolitical shocks (Dabrowski, 2019). These shocks were created due to the significant decrease n prices of oil and other commodities, regulations imposed by the United States, and the European Union (Dabrowski, 2019).

Economic Growth of Greece

From the above table, Greece was adversely impacted by the crisis, the GDP growth rates were negative from 2006 till 2013, slightly improved in 2014 but became negative for 2015. However, in the year 2017 and 2018, it witnessed positive GDP growth rates. The period after 2008, the economy was hit adversely by the Great Recession, the GDP fell, this was due to a decline in the labor inputs, degradation of Total Factor Productivity and dip in et capital formation (Leounakis & Sakellaris, 2019).

The financial crisis had weakened the other factors namely, investment, trade openness, consumption as well as population growth (Pegkas & Panagiotis, 2018). The economy was hit by fiscal structural imbalances and financial issues, correspondingly, the government debt augmented sharply. In addition to this, the rigid labor and product market laws worsened the situation (Pegkas & Panagiotis, 2018). However, the economy is now recovering and the fiscal credibility has enhanced, this can be attributed to augmenting the pace of structural and adjustment reforms (Organization for Economic Cooperation and Development, 2018). Fiscal consolidation has caused a decline in the public finance imbalance, exports have risen because of the labor market reforms. Moreover, the improvements in banking sectors have revived investment growth (Organization for Economic Cooperation and Development, 2018).

Economic Growth in Italy

In the year 2006 and 2007, Italy witnessed positive GDP growth rates, however, from 2008, the economy witnessed negative or low growth. A mild rise in GDP growth rates was witnessed post-2015. The Great recession accompanied by the immense public debt burden and declining productivity growth resulted in sluggish GDP (Antonin, Guerini, Napoletano & Vona, 2019). The depression impacted the fiscal consolidation efforts that were taken by the country and the debt crisis in Europe that followed it, worsened the situation for Italy. The Public debt-GDP ratio increased rapidly from 100% in the year 2007 and rose to 131% in the year 2014 (Antonin, et al., 2019). Since 2008, the economy witnessed, excess of imports over the exports along with fall in private consumption and investment expenditure and low government consumption expenditure, all these factors combined resulted in degradation of aggregate demand, thereby, leading to declining in the aggregate output (Antonin, et al., 2019). However, in the year after 2015, Italy has shown modest recovery, this was due to supportive economic conditions globally, easing of monetary policies, structural reforms along with judicious fiscal policies (Organization for Economic Cooperation and Development, 2019). Moreover, the banking sectors flourished which supported the recovery process.

Economic Growth in Spain

Spain was witnessing a great period of economic expansion before the year 2006, the great depression started in 2007 and aggravated in 2008 negatively impacted the growth cycle of Spain (Rahman, Galvan, & Martinez, 2017). The economic recession was a result of both the exogenous as well as endogenous factors. Exogenous factors comprise the increased raw material prices while the endogenous factors comprise the busting of the real estate bubble and low productivity of the labor force (Rahman, Galvan, & Martinez, 2017). Since 2014, the effect of the crisis has reduced as a result of reforms that have implemented ta the national levels and restructuring of the banking system (Rahman, Galvan, & Martinez, 2017). The expansionary bais of the fiscal as well as monetary policies have pushed the aggregate output and resulted in GDP growth (BBVA research, 2018).

Relationship Between Economic Growth, Inflation, and Unemployment Rate

Inflation and rate of unemployment are related in the short run, there is a negative relationship between the two (Pal, 2018). Steps taken to reduce inflation will result in a rise in unemployment and vice versa, although this is temporary. This relationship was shown by the Phillips Curve (Pal, 2018). Furthermore, economic growth is negatively related to the unemployment rate (Pal, 2018). With economic growth, there will be a rise in the income of people. A higher disposable income will lead to higher demand for goods and services, in order to satisfy this demand, the producers will increase the supply. Consequently, they will hire more workers, thereby, causing a reduction in the unemployment rate.

The relationship between Phillips Curve has weakened over time, it is now not an accurate means to anticipate inflation (Merler, 2017). It is difficult to accurately measure the relationship between these three macroeconomic indicators. The relationship between economic growth and inflation, unemployment, and inflation rate and unemployment and economic growth is debatable. Economic growth can have positive, adverse, or no effect on the inflation rate as these are impacted by many social, economic, demographic, and political factors (Ruzima & Veerachamy, 2016). 

Russia witnessed a decline in GDP growth along with rising volatility made it prone to economic and political shocks. Moreover, high inflation in Russia resulted in suppressing the real disposable income, thus real wages declined and hence the unemployment remained high in the country (Dabrowski, 2019). The higher level of unemployment rate resulted in the contraction of economic activities. Russia witnessed the highest rate of inflation in the year 2015, along with the rising unemployment rate and negative GDP growth rate in the selected period from 2006-2018. Greece's economy showed positive signs of growth in the year 2017 and 2018, in these years, the inflation rate rose in 2017 while it decreased in 2018. Simultaneously, the unemployment rate has been decreasing in these two years. The economic recovery in Greece was made possible because of reforms in the labor market. Unemployment is decreasing and an increase in women's participation in the labor force is witnessed (Organization for Economic Cooperation and Development, 2018).

Since 2015, Italy has been witnessing positive economic growth, along with the decrease in the unemployment rate and moderate inflation rates. This is a positive sign of recovery. All these changes were made possible because of the reform packages (Organization for Economic Cooperation and Development, 2019). Spain is surrounded by the vicious circle of the high unemployment rate, rising public debt, and low economic growth (Rahman, Galvan, & Martinez, 2017). All age groups were adversely impacted by the economic crisis as a result, the unemployment rate has been high. The inflexible labor markets and a high level of debt accumulated by both the private sector and the public sector resulted in higher unemployment rates (Rahman, Galvan, & Martinez, 2017). In the year 2013, Spain witnessed negative GDP growth, a moderate inflation rate, and soaring unemployment rates. However, after that year, in 2014, the country witnesses positive economic growth, which was not supported by the inflation rate, the inflation rate fell drastically along with a fall in the unemployment rate. Thus, the inverse relationship between unemployment and inflation rate was proved wrong and the positive relationship between economic growth and inflation was also not justified, while the negative relationship between unemployment and GDP growth rate was proven true.

Conclusion on Principles of Economics

The government of a nation tries to maintain higher economic growth along with lower levels of inflation and unemployment rates. However, it is difficult to sustain these relationships since these factors are interrelated and impacted by many other social, political, economic factors. Historically, there was a positive relationship between the rate of economic growth as well as the inflation rate, but this is not true for these countries. The Philips curve has also flattened over time as supported by many economists. The analysis has shown that recession has adversely impacted the economic growth and the effect lasted for many years in Spain, Italy, and Greece, while Russia flourished slowly, all the factors impacting these are discussed.

Reference for Principles of Economics

AKINSOLA, A. F. & ODHIAMBO, M.N. (2017). Inflation and economic growth: A review of the international literature. Comparative Economic Research, 20 DOI: https://doi.org/10.1515/cer-2017-0019

Antonin, C., Guerini, M., Napoletano, M. & Vona, F. (2019). Italy: Escaping the high-debt and low-growth trap. Sciences Po OFCE Working Paper. www.ofce.sciences-po.fr/pdf/dtravail/WP2019-07.pdf

BBVA Research (2018). Spain economic outlook; 3rd quarter of 2018. Retrieved from https://www.bbvaresearch.com/wp-content/uploads/2018/07/Spain_Outlook_3T18.pdf

Dabrowski, M. (2019). Factors determining Russia’s long-term growth rate. Russian Journal of Economics, 5, 328-353. DOI 10.32609/j.ruje.5.49417

Leounakis, N. & Sakellaris, P. ( 2019). Greek economic growth: Past and future. Tufts University. https://sites.tufts.edu/karamanlischair/files/2019/06/CGK-WP-no-2019-07-Greek-Economic-Growth-May.pdf

Macrotrends. (2020a). Russia GDP growth rate 1990-2020. Retrieved from https://www.macrotrends.net/countries/RUS/russia/gdp-growth-rate

Macrotrends. (2020b). Russia inflation rate 1993-2020. Retrieved from https://www.macrotrends.net/countries/RUS/russia/inflation-rate-cpi

Macrotrends. (2020c). Russia unemployment rate 1991-2020. Retrieved from https://www.macrotrends.net/countries/RUS/russia/unemployment-rate

Macrotrends. (2020d). Greece GDP growth rate 1961-2020. Retrieved from https://www.macrotrends.net/countries/GRC/greece/gdp-growth-rate

Macrotrends. (2020e). Greece unemployment rate 1991-2020. Retrieved from https://www.macrotrends.net/countries/GRC/greece/unemployment-rate

Macrotrends. (2020f). Greece inflation rate 1960-2020. Retrieved from https://www.macrotrends.net/countries/GRC/greece/inflation-rate-cpi

Macrotrends. (2020g). Spain unemployment rate 1991-2020. Retrieved from https://www.macrotrends.net/countries/ESP/spain/unemployment-rate

Macrotrends. (2020h). Spain GDP growth rate 1961-2020. Retrieved from https://www.macrotrends.net/countries/ESP/spain/gdp-growth-rate

Macrotrends. (2020i). Spain inflation rate 1960-2020. Retrieved from https://www.macrotrends.net/countries/ESP/spain/inflation-rate-cpi

Macrotrends. (2020j). Italy inflation rate 1960-2020. Retrieved from https://www.macrotrends.net/countries/ITA/italy/inflation-rate-cpi

Macrotrends. (2020k). Italy GDP growth rate 1961-2020. Retrieved from https://www.macrotrends.net/countries/ITA/italy/gdp-growth-rate

Macrotrends. (2020l). Italy unemployment rate 1991-2020. Retrieved from https://www.macrotrends.net/countries/ITA/italy/unemployment-rate

Merler, S. (2017). Has the Phillips curve disappeared? Retrieved from https://www.bruegel.org/2017/11/has-the-phillips-curve-disappeared/

Organization for Economic Cooperation and Development. (2018). OECD Economic Surveys; Greece. Retrieved from http://www.oecd.org/economy/surveys/Greece-2018-OECD-economic-survey-overview.pdf

Organization for Economic Cooperation and Development. (2019). OECD Economic Surveys in Italy. Retrieved from https://www.oecd.org/economy/surveys/Italy-2019-OECD-economic-survey-overview.pdf

Pal, R (2018). Economic growth, inflation, and unemployment. Retrieved from https://www.researchgate.net/publication/323383852_Economic_Growth_Inflation_and_Unemployment

Pegkas & Panagiotis. (2018). The effect of government debt and other determinants on economic growth: The Greek experience, economies. MDPI, 6 (1), 1-19. http://dx.doi.org/10.3390/economies6010010

Rahman, H.M., Galvan, S.R. & Martinez, B. A. (2017). Economic recession in Spain: Exploring the root causes, consequences, and recoveries for sustainable economic growth. International Journal of Econometrics and Financial Management, 5(2), 60-68. DOI: 10.12691/ijefm-5-2-5

Ruzima, M. & Veerachamy, P. (2016). Impact of inflation on economic growth: A survey of literature review. International Multidisciplinary Research Journal, 5 (10). https://www.researchgate.net/publication/324829545_IMPACT_OF_INFLATION_ON_ECONOMIC_GROWTH_A_SURVEY_OF_LITERATURE_REVIEW

Tsai, F. (2019). An overview of macroeconomics: ideas, approaches, and importance. International Journal of Tax Economics and Management, 2(3), 21-31. DOI: 10.35935/tax/23.3121

Voskoboynikov, B. I. ( 2017).Sources of long-run economic growth in Russia before and after the global financial crisis. Russian Journal of Economics, 3(4), 348-365. https://doi.org/10.1016/j.ruje.2017.12.003

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