Transcript The national economic environment - Karelia-amk

THE NATIONAL ECONOMIC
ENVIRONMENT
Pertti Laitinen
Savings
Imports
Households
Government
spending
Payment for
goods and
services
Goodss
and
services
Taxes
Government
Government
spending
Labour
Taxes
Businesses
Investment
Exports
Wages and
salaries
GROSS NATIONAL INCOME
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The sum of a nation’s gross domestic product (GDP)
plus net income received from overseas. Gross
national income (GNI) is defined as the sum of value
added by all producers who are residents in a nation,
plus any product taxes (minus subsidies) not included
in output, plus income received from abroad such as
employee compensation and property income.
GNI measures income received by a country both
domestically and from overseas. In this respect, GNI
is quite similar to Gross National Product (GNP),
which measures output from the citizens and
companies of a particular nation, regardless of
whether they are located within its boundaries or
overseas.
INFLATION
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The rate of inflation is expressed as a percentage rise
or fall in prices in reference to a specific starting point
Consumer price inflation in the euro area is measured
by the Harmonised Index of Consumer Prices (HICP).
The HICP is compiled by Eurostat and the national
statistical institutes in accordance with harmonised
statistical methods.
The ECB aims to maintain annual inflation rates as
measured by the HICP, but close to, 2% over the
medium term. The HICP is also used in assessing
whether a country is ready to join the euro area.
https://www.ecb.europa.eu/stats/prices/hicp/html/inde
x.en.html
CAUSES OF INFLATION
The demand-pull explanation→ excess demand in
the economy, which may be the result of cheap
borrowing or tax cuts encourages producers to
raise prices which lead to rise in wage demands
 The cost-push argument → excessive costs drive
up prices
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Rising wage costs are passed on to the consumers in
the form of higher prices
 Creating a wage-price inflationary spiral
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Goods produced less competive in foreign
markets
 Reduces FDI
 Interest rates increase
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UNEMPLOYMENT
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ILO unemployment = People who are:
Without a job, want a job, have actively sought work
in tha last four weeks and are available to start work
in the next two weeks
 Out of work, have found a job and are waiting to start
in the next two weeks
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In structural unemployment jobs have been lost
due to changing technology or industries
relocating in other regions/countries
 Frictional unemployment refers to the usual
turnover in the labour force
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BALANCE OF PAYMENTS
The balance of payments refers to credit and
debit transactions between a country’s
redidents(including companies) and those of
other countries
 The current account
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The capital account
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Trade of goods (merchandise trade account)
Services (the services account)
Profits and interest earned from overseas assets
Transactions involving the sale and purchase of
assets (shares etc.)
A current account deficit means that a country’s
imports are worth more than its exports
ECONOMIC GROWTH
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Economic growth refers to a coutry’s increase in
national income
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Expansion in the production of goods and services
It used to mean rising living standards, healthy
capital investment and rising welfare provisions
 In many casesit does not guarantee
improvements in well-being of the whole society:
 Rapid population growth
 Weak institutions
 Wide inequalities of income and opportunities
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THE BUSINESS CYCLE
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Prosperity
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Recession
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The expansive phase, in which total income is high and
unemployment is low
The phase of economic downturn, in which unemployment
is rising as consumers and businesses spend less
Depression
The phase when recession deepens to a near total lack of
confidence in the economy
 High unemployment and weak consumer spending
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Recovery
The phase of upturn from recession or depression
Unemployment declining, consumers resume
spending
THE ROLE OF GOVERNANCE IN THE
ECONOMY
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Fiscal policy refers to the budgetary policies for
balancing spending with taxation
Monetary policy refers to policies for determining
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the amount of money in the supply,
rates of interest
exchange rates
Governments are required to submit a national
budget annually setting out plans for public
expenditure and the raising of money
The Treasury is the government department
responsible for overseeing spending policy and
making budget recommendations to the government
The central bank is responsible for issuing
the´country’s notes and coins and implementing the
government’s monetary policy
FISCAL POLICY
Governments must raise money in order to fund
public spending
 If the government reduces taxation or increases
public spending there will be increased demand
for goods and services in the economy
 Fiscal framework is based on:
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Transparency
Stability
Responsibility
Fairness
efficiency
PUBLIC SPENDING FINANCE
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Direct taxation
Income tax (progressive)
 Corporate tax
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Indirect taxation
VAT
 Petrol duty
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Social security contributions
 Borrowing
 Tax concessions to corporate taxpayers or SME’s
can encourage investment
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THE NATIONAL DEBT
National debt, expressed as a percentage of GDP
can grow to be too large to handle
 Maastricht criteria states that the government
deficit should be below 3 per cent of GDP and
national debt should not exceed 60 %
 Countries like Greece, Italy, Japan and Spain
have a very high level of national debt
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EUROPEAN MONETARY UNION
What are the benefit of EMU
 What are the problems caused by EMU
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