Economic Analysis of Germany

Question: Discuss about theEconomic Analysis of Germany. Answer: Germany in central Western Europe is a federal republic. It is regarded as Europes strongest economy, accounting fourth largest nominal GDP in the world and for GDP (PPP), fifth largest. The countrys economic form is based on social market economy. It is also regarded as the biggest capital exporter globally after its highest traded surplus of $285 billion recorded in 2014 and also the 3rd largest exporter globally. 70% of Germanys total GDP is due to service sector contribution, industry contributes 29.1% and 0.9% contributed by agriculture (The Economist, 2016). In the following sections we look into various other economic factors which shows how Germany had been performing over the years. Analysis of Production Output Performance While analyzing the performance of an economy a number of indicators are considered. The key indicators are nominal GDP, real GDP and per capita GDP. Gross domestic product or GDP is the total amount of final goods and services produced in monetary terms within a countrys borders at a specific point of time or period (Mankiw, 2003). The GDP calculated at current market prices is known as the nominal GDP whereas Real GDP is the GDP calculated adjusting for inflation based on the prices of some base year. The total GDP divided by the countrys total population is called the real GDP per capita. This indicator helps in comparing a countrys performance to another country. Real GP per capita or real GDP are regarded as suitable measures of economic activity because these take price fluctuations into account (Samuelson et al, 2010). We can see the trends in these indicators of Germany in the table given below. We consider the data for the country from 2005 to 2015. We see that the minimu nominal GDP had been in 2005 which had been on an increasing trend till 2014 with few dips in between. But after 2014, the GDP has significantly fallen in 2015. A clearer picture can be obtained from the real GDP values which also shows an increasing trend with dips in 2009 to 2010 and then the highest dip in 2015. On the other hand the GDP per capita has been on a consistent trend after 2005 with highest being in 2015. The real GDP growth rate shows that the economy faced a recession in 2009 because of the global financial crisis which cause a dip in growth rate by -5.62%, though it again rose to 4.1% in 2010 but had been low in 2012, 2013 and also considerably in 2014. The years after 2010, were overshadowed by the Euro-zone crisis which resulted in fall in demand in Europes southern countries. The federal government of Germany plays a very important role in the countrys economy both directly and indirectly. The government makes influential changes via reforms and policies. The many offices in the government has wide ranging effects on the economy. The government had made effective changes via its socio-economic welfare schemes, tax decisions and investments in energy, education, research and science. The government had been targeting the strengthening of both private and public sector investments in the country and the formation of a modern and efficient infrastructure along with pro-growth fiscal consolidation. In 2014, for the first time the federal budget did not require any kind of net new borrowing and also the 2016 budget draft also doesnt include new debts. The European Commissions investment initiative is also welcomed by the government. Fiscal policies of increased government expenditures or reduction in taxes increase aggregate demand in the economy which boosts output and economic growth. Expansionary monetary policies which increases money supply and reduces interest rates induces rise in investment and hence boosting the GDP of an economy (Mankiw, 2007). Year Nominal GDP (Current US $) Real GDP GDP per capita Real GDP growth rate (annual %) 2005 2861410272354 30177172367 38971.64189 0.706713948 2006 3002446368084 31568592648 40459.26614 3.700159572 2007 3439953462907 35564993567 41834.35772 3.260535297 2008 3752365607148 38472258386 42367.61987 1.082315404 2009 3418005001389 34439033759 40088.49145 -5.618860435 2010 3417298013245 34172980132 41788.04479 4.079933305 2011 3757464553795 37176677787 43306.50245 3.660000155 2012 3539615377795 34502743504 44223.65407 0.405170675 2013 3745317149399 35760363744 43433.55434 0.297847586 2014 3868291231824 36304896519 44755.17894 1.599770392 2015 3355772429855 30859428968 45269.78914 1.687723781 Source: World Bank Data Source: World Bank Data Source: World Bank Data Source: World Bank Data Analysis of Labor Market The percentage of total persons unemployed in a country out of the total labor force is known as the unemployment rate of that country (Lipsey et al, 2011). Unemployment is of 4 types. These are: Structural unemployment: Unemployment caused due the labor market inefficiencies and the structural problem in the economy. Example: Industrial revolution introduced weaving machines which caused weavers to be jobless. Frictional unemployment: Shifting of people from one job to another or people in search of new jobs. Example: An individual quitting if he/she dislikes their job or getting fired for poor work. Cyclical unemployment: When there is a lack of adequate aggregate demand in the economy there is lesser jobs and hence resulting in individuals to be unemployed who are actively searching for jobs. Example: Low aggregate demand at recession periods resulting in less creation of jobs. Classical unemployment: Real wages for a specific job is put above the clearing price of the labor market (Sikder, 2006) We see the trends in the unemployment rates of Germany since 2005 to 2015 in the table given below. A graphical representation of the trend is also seen in the graph. As we see in the table, the unemployment rate of Germany had been the highest in 2005 and had been decreasing since then reaching its minimum in 2014, i.e., 5%, which is considerably low. Hence, Germanys unemployment rates had been decreasing considerably over the years with significant low unemployment in the present time. The data shows the improvement in the German labor market despite the European crisis. YEAR UNEMPLOYMNET RATES (%) 2005 11.10000038 2006 10.30000019 2007 8.600000381 2008 7.5 2009 7.699999809 2010 7.099999905 2011 5.900000095 2012 5.400000095 2013 5.300000191 2014 5 Source: World Bank Data Source: World Bank Data The steady decline in unemployment over the years is due to some particular reasons. These are: Fall in the working age population higher growth during the crisis short-time working also increased wages are also seen to have risen much less than productivity The labor market is said to have profoundly changed because of the Hartz reforms implemented between the years 2003 and 2005. (Bauer, 2013) It is seen to appear that the fall in the German unemployment is of the structural type. Since, 2005 wages are seen to increase by just 2% though the unemployment rate had been halved. The term sclerosis is also often used to characterize the German labor market to indicate the phenomenon where rigidities in the country leads to an economic structure which is less flexible implying a sluggish labor market. Hence the type of unemployment in the country is generally found to be structural in nature. The recent low levels of unemployment is generally because of the fall in the working age population and high growth whereas in previous periods the type of unemployment in the country had been because of the structural changes coming in economy (Institute for employment research, 2015). German government had opted for various labor market reforms and wage constraints to accomplish its objective to achieve full employment. Germanys unemployment as seen had considerably declined over the years resulting to low levels of employment. The wage restraint and Hartz reforms (Krebs, 2010) before 2005 had contributed to the fall in the structural unemployment which included decrease in wage unit costs and provision of benefits and support to the jobless. In general, the government curbs unemployment by fiscal and monetary policies. Increase in government expenditures, increases aggregate demand, inducing firms to produce more hence hiring more workers which reduce unemployment. Monetary policies also help in reducing unemployment. For instance, expansionary monetary policies, increases the money supply in the economy, lowering interest rates and hence increasing investments which boosts employment (Schnieder et al, 2010). Analysis of the Price Level Inflation is the persistent increase in the price level of an economy. Inflation can be caused from sources resulting from either the demand side or the supply side. A state of full employment in an economy results in an increase in the aggregate demand which gives rise to a situation of excess demand causing prices to rise. (Sowel, 2010) This kind of inflation is called demand pull inflation. As for the supply side, firms often pass on rising costs to consumers in form of higher prices charged which causes cost push inflation. The following table shows the trends in the inflation rates of Germany since 2005 to 2015. The inflation rates are seen to be more or less in the initial years though reaching its highest in 2013 with 2.09% and its second highest in 2015 with an inflation rate of 2.06%. The graph gives us a clearer insight into the peaks and dips of the inflation rates showing us how prices have fluctuated in Germany over the years. We hence, see that the inflation rates do show that the inflation rates in the country had been considerably low over the time periods. The low trend in inflation for too long also is not seen by the economy too optimistically as it results in lower investments, less jobs and hence low economic activity. The European Central Bank has set certain objectives to give a push on inflation upwards hence, focusing on price stability. The major causes of the low inflation are considered as global factors which may be settled with time (Watkins). The ECB had been focusing on various monetary policies to bring inflation up (ECB, 2016). The government takes in various measures to bring price stability in the economy via fiscal and monetary policies. Monetary policies which reduce the money supply in an economy is called contractionary monetary policy. This results in fall in spending and hence, reduced aggregate demand. Lower demand causes fall in prices and hence curbing inflation. Policies adopted by the government in form of reduced expenditures are fiscal policies which also educe demand and hence lowers price (Bromley, 2015). YEAR INFLATION 2005 0.620694358 2006 0.304045355 2007 1.697387271 2008 0.838791683 2009 1.7569942 2010 0.757704408 2011 1.070476908 2012 1.502824785 2013 2.090240731 2014 1.734273628 2015 2.058846634 Source: World Bank Data Source: World Bank Data Conclusion In the above sections we saw how the German economy has evolved over the time periods with increase in real GDP, significant decrease in unemployment and an overall consistently low levels of inflation rates since 2005 to 2015. The data and trends in those, show the economy had been performing really well. The government also had been taking necessary reforms to increase the total labor force with the fall in the working age population and also focusing on bringing price stability by prober monetary policies. The economy had also gone through the the global economic crisis and had been able to come out of it effectively bouncing back to higher economic growth. The country had evolved with increasing standard of living of the people, maintaining norms of sustainable development. References Samuelson, P. Nordhaus, W. (2010). Economics. New Delhi: Tata McGraw Hill Lipsey, R. Chrystal, A. (2011). Economics. New Delhi : Oxford Mankiw, G. (2007). Economics: principles and applications. New Delhi: Cengage learning Sowell, T. (2010). Basic economics. USA: Basic books Sikdar,S. ( 2006). Principles of Macroeconomics. New Delhi: Oxford. Mankiw, G. (2003). Macroeconomics. New York: Worth publishers, Schneider, H Zimmermann, M. (2010). Strategies to achieve full employment in Germany. Available at: https://ftp.iza.org/pp15.pdf [Accessed: 15 November. 2016] Institute for employment research. (2015). Structural employment in selected countries. Available at: https://doku.iab.de/aktuell/2015/aktueller_bericht_1504.pdf [Accessed: 15 November. 2016] Bauer, G. (2013). Unemployment in Germany. Available at: https://graphitepublications.com/wp-content/uploads/2013/04/Unemployment-in-Germany.pdf [Accessed: 15 November. 2016] European Central Bank. (2016). ECBs fight against low inflation. Available at: https://www.ecb.europa.eu/press/key/date/2016/html/sp160404.en.html [Accessed: 15 November. 2016] Bromley, R. (2015) Nominal growth real growth and the inflation rate. https://www.raybromley.com/notes/realnominterest.html [Accessed: 15 November. 2016] Krebs, T. (2013). German labor reforms. Available at: https://voxeu.org/article/german-labour-reforms-unpopular-success [Accessed: 15 November. 2016] The Economist. (2016). Germany. Available at: https://country.eiu.com/germany [Accessed: 15 November. 2016] Watkins, T. Economic history of Germany. Available at: https://www.sjsu.edu/faculty/watkins/germany.htm [Accessed: 15 November. 2016]