The aim of the project is to investigate the share of the world’s economy for Europe’s four largest economies, which has been rapidly declining. The project uses statistical data on Germany, Italy, France, Portugal, Belgium, Canada, USA, Australia, Switzerland, Finland, UK, Japan, Netherlands, Norway, Sweden, Denmark and Spain in its comparison and analysis.
Relevance of data
Several sets of data have been gathered and used in this comparative analysis. The data sets were of the real economy, international date, government data, data on money, interest rates and price, crisis data, credit data and data on asset prices. This creates an extensive pool of data with information that was not previously freely available to researchers, such as credit data for the countries.
Year: the Year is very crucial because it is the foundation of the rest of the data. Without information of what year the article is dealing with, it becomes difficult to compare the growth and progress of the countries. It becomes easy to compare data across various countries using one year as the basis or comparing data of a single country over several years.
Population: the data on population helps readers to gauge how many people are competing for the available resources in a country. For instance, when the population is very high and the resources are very low, the researcher can tell that the country is not doing very well economically compared to a country with low population and many available resources for the population. Population is the foundation upon which other variables such as real GDP per capita and housing index are calculated and is, therefore, very important (Meyer, 2012).
Real GDP Per Capita (PPP): this is an economic indicator of the average output from every individual in the population per year compared to a set base year. GDP stands for Gross Domestic Product and refers to the total production of a country for a particular year. It is called Real GDP when the figure has been adjusted for inflation. The PPP is in most times used to compare the living standards between different countries that use the same currency or for the same country over a number of years. The real GDP per capita is arrived at by dividing the real GDP (R) by the population (c).
Real GDP per capita = R/C.
Real GDP Per Capita (index, 2005=100): these data figures give us the PPP when 2005 is used as the base year for calculating the PPP.
Real consumption per capita (index, 2006=100): it refers to the average consumption per person in the population. These statistics use 2006 as the base year and so the real consumption per capital is calculated using 2006 as the base. It is referred to as real because the figures have been adjusted for inflation.
Investment-to-GDP Ratio: this ratio is used to show the value of investment as a percentage of the GDP at market prices. It, therefore, gives a comparison of the value of the investments made by a country with the value of outputs the country is producing. The larger the ratio, the higher the value of the investment is compared to the GDP. This is a positive sign which indicates that a country is catching up economically.
Consumer Price Index: the consumer price index measures the cost of living index in a country. It averages the prices of goods and services for consumers against a set base and comparing them to see whether the cost of living has increased or gone down. This project has used 1990 as the base year.
Current Account: the current account gives an overview of the difference between the savings of a country and its investment. When the current account of a country is positive, then the country is a lender as opposed to a country with a negative current account which indicates that the country is a borrower. The current account also reflects on a country’s balance of payments since the biggest determinant of a current account is the surplus or deficit that remains once imports
are subtracted from the exports (Keynes, 2016).
Imports: imports are the amount of goods and services that a country obtains from other countries. Nominal rates are those which have not been adjusted to cater for inflation.
Exports: these are the goods and services that a country sells to other countries, thereby earning foreign exchange. In this project, the exports have been given nominal values that have not been adjusted for inflation (McCombie and Thirlwall, 2016).
Narrow Money: narrow money refers to physical components of money supply such as currency and coins as well as demand deposits and other financial assets held by the central bank which is considered to be liquid.
Broad Money: this is a more non-restrictive definition of money supply which describes not only the currency, coins and financial assets that are easy to liquefy but also includes accounts and deposits that would take a longer time to mature and liquefy such as money market, capital market funds and other financial instruments. Broad money is a key indicator of the level of inflation and interest rates in a country because when there is no money in the economy, the economy slows down and prices come down. When there is an increase in money supply in the economy, businesses have easier access to financing which makes prices go up (Meyer, 2012).
Short-Term Interest Rate: they are also known as money market rates and are interest rates on financial instruments for less than one year such as treasury bills, bank certificates and commercial papers (Keynes, 2016).
Long-Term Interest Rates: these refer to interest rates on government bonds which usually mature in ten years. Long-term interest rates are good economic performance indicators because when they are low, they encourage businesses to invest whereas they discourage investment when they are high.
Stock Prices (Nominal Index): this is the cost of buying securities and the value can be used to show the volatility of the market and economic conditions of a country. When stock prices decrease, it could be an indicator of future recession of the economy whereas an increase in stock prices could be an indication of future economic growth.
Public Debt-To-GDP Ratio: this measures the ratio of the public debt of a country to its GDP. This ratio then gives an indication of a country’s ability to pay its debts. The higher the ratio, the more difficult it is for a country to pay its debts. The number is also interpreted as the number of years a country requires to repay its current debt; thus the higher the ratio, the longer a country will take to repay its debts (Meyer, 2012).
Government Revenues: These are the sources of income for a government. The government needs money so that it can be able to carry out developmental activities in the countries such as growing infrastructure such as roads, railways and providing public services such as health care and education. Taxes are the main sources of revenue for the government as well as fees paid in order to deliver other services such as sewage treatment, water, electricity, etc. donations and grants are also part f government revenues. The project used nominal rates of the local currency for the government revenues.
Government Expenditure: this refers to government spending and encompasses all consumption, transfer payments and investments made by the government. The expenditure can be to satisfy the needs of the citizens or to create future benefits such as spending on research pertaining to a certain disease or investing in infrastructure that will be used way later in the future.
USD Exchange Rate: this is the exchange rate of a local currency measured against the United States dollar. The USD rate is used in this project because many international financial transactions are measured using the USD as the standard. The USD rate gives an approximate relative value of other currencies in the world hence why it is preferred for economic comparisons across various countries.
Systematic Financial Crisis: this is the risk that an event in a certain company could trigger events that are capable of causing critical instability or even collapse of an entire industry or whole economy in a country. Thus, the federal government is forced to intervene in the economy through regulations to be followed by companies. By intervening, the government dilutes the effects of the ripple effect that can result from events in a certain company.
Total loans to non-financial private sector: these are the financial resources that are availed to the private sector by financial corporations through loans. These corporations include insurance companies, money banks, monetary authorities and other financial and leasing companies.
Mortgage loans to non-financial private sector: these are the financial resources that are availed to the private sector by financial corporations in form of mortgages. These corporations include insurance companies, money banks, monetary authorities and other financial and leasing companies
Total loans to households: this refers to the total sum of loans that households have been given by financial corporations such as banks, insurance companies and money market.
Total loans to business: these are the total financial resources that have been given to businesses by financial corporations in form of loans.
House prices: these indicate the prices of housing in the country. The housing market is very influential in the economy because when the prices of houses go up, consumer spending increases which lead to higher economic growth. Consumer confidence reduces when the house prices come down thereby leading to lower economic growth (Lewis, 2013). Also, falling prices of houses results to entrapment of people in negative equity whereby people end up owning houses that have less value than the outstanding mortgage they owe; leading to a decline in economic performance.
Relationship between data
The real economy was represented using the following variables: the nominal GDP, the real GDP per capita, the real GDP per capita index with 2005 as the base year, the real consumption per capita, the population and the investment-to-GDP ratio. Information pertaining to the international trade of the countries was represented using data about the current account, import and exports all which used nominal local currencies. The data also analyzed the USD exchange rate of all the countries and used the USD strictly to standardize the analysis (Keynes, 2016). Government activities were measured and represented by statistics on the government revenue and the government expenditure using the nominal and local currencies of each respective country. The public debt-to-GDP ratio was also used as a variable to explain government activities. Money, interest rates and prices were represented using data on narrow and broad money which was measured as per the nominal value of the local currencies. The project also gave information on both the long term and short term interest rates of the countries and the consumer price index. Credit data was represented by data on total loans to non-financial private sector, mortgage loans to non-financial private sector, total loans to businesses and the total loans to households. All were valued at the nominal value of the countries’ respective local currencies. The project also considered the prices of assets by considering the prices of houses and of stocks. For comparison, all of them used 1990 as the base year. The project went a step further to even incorporate crisis dates that might have affected the economic growth of the countries, with a range of 0 to 1 (Meyer, 2012).
As is evident from the above data, the population of the countries has continued to grow over the years. The data also shows a steady decline in the economic performance of the countries based on the performance indicators such as GDP per capita and the balance of payments in the countries. Most of the countries seemed to share similar macroeconomic factors for economic growth apart from the United States which uniquely stood out on issues concerning systemic financial crisis. It seems that the country has always been at systemic risk throughout its economic history unlike the other countries whose systemic risk appeared once in a while.
There are many other factors that are to be considered that have had a significant effect on the dwindling economic status of countries in Europe. These variables also need to be further investigated and included in the data set to give a more accurate picture of the economic state. One such important variable is birth rates in the countries. Countries with very high birth rates have witnessed population explosion which results to increased competition for available resources such as housing and sanitary services. Another variable that should be incorporated in future datasets is that of employment and unemployment rates. The rates of employment in a country are good indicator of the economic performance of a country. A country with extremely high unemployment rates is cause for concern as it indicates an economy that is slowing down or performing dismally. High rates of unemployment in a country mean that the GDP is also low and the productivity of a country decreases; making it less competitive among other countries. In addition, the data set should contain inflation variables over the years. Inflation refers to the increase in prices of goods and services or the increase in the supply of money in the economy. By providing such data, it will make it easier to compare the rates of inflation of different countries in specific year or inflation rate of a specific country over a period of time. High rates of inflation in a country may signify economic growth. When the aggregate demand in a country expands more than the aggregate supply, then the economic growth that follows becomes higher than the economy can sustain; causing inflation.
There are also other factors that influence economic growth that are difficult to represent in numerical figures yet they are important and should not be overlooked when making such comparisons. Information technology, for instance, plays an integral role in the growth of economies in today’s modern world. Countries that invest highly in IT are more economically developed than those which give IT a backseat. IT eases the way business is conducted by organizations, including improving communication and infrastructure. Therefore, more effort needs to be made when compiling such database in future to give data pertaining to how countries have invested in IT.
- Keynes, J. (2016). General theory of employment, interest and money. New York: Atlantic Publishers & Dist.
- Lewis, W.A. (2013). Theory of economic growth (Vol. 7). London: Routledge.
- McCombie, J. and Thirlwall, A.P. (2016). Economic growth and the balance-of-payments constraint. Berlin: Springer.
- Meyer, S. (2012). Understanding economic data. New York, Rosen Pub.