T HE NATIONAL ECONOMIC ENVIRONMENT Pertti Laitinen

Households Businesses Government Payment for goods and services Imports Savings Government spending Taxes Goodss and services Labour Wages and salaries Exports Investment Taxes Government spending

G ROSS NATIONAL INCOME 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.

I NFLATION 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. x.en.html

C AUSES 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 Rising wage costs are passed on to the consumers in the form of higher prices Creating a wage-price inflationary spiral Goods produced less competive in foreign markets Reduces FDI Interest rates increase

U NEMPLOYMENT 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 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

B ALANCE 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 Trade of goods (merchandise trade account) Services (the services account) Profits and interest earned from overseas assets The capital account 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

E CONOMIC GROWTH Economic growth refers to a coutry’s increase in national income 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

T HE BUSINESS CYCLE Prosperity The expansive phase, in which total income is high and unemployment is low Recession 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 Recovery The phase of upturn from recession or depression Unemployment declining, consumers resume spending

T HE ROLE OF GOVERNANCE IN THE ECONOMY Fiscal policy refers to the budgetary policies for balancing spending with taxation Monetary policy refers to policies for determining 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

F ISCAL 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: Transparency Stability Responsibility Fairness efficiency

P UBLIC SPENDING FINANCE Direct taxation Income tax (progressive) Corporate tax Indirect taxation VAT Petrol duty Social security contributions Borrowing Tax concessions to corporate taxpayers or SME’s can encourage investment

T HE 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

E UROPEAN MONETARY UNION What are the benefit of EMU What are the problems caused by EMU