european finance and economy lesson 2
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8/3/2019 European Finance and Economy Lesson 2
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European Finance and Economy
esson un amen a conom cTerms
Prof. Dr. Brigitta Herrmann
10/13/2011
8/3/2019 European Finance and Economy Lesson 2
http://slidepdf.com/reader/full/european-finance-and-economy-lesson-2 2/20
Outline
1. How is the GDP measured?
2. Understanding inflation rate
3. Relationship between Inflation rate and
.
2. Savings
3. Investment
4. Employment
4. Budget Deficit
5. Government Debt
13.10.2011 2Prof. Dr. Brigitta Herrmann
8/3/2019 European Finance and Economy Lesson 2
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1. How is the GDP measured?
GDP (Gross Domestic Product):
• Measure of the economic performance of a nationaleconomy over a given period
• Gives the value of final goods and services produced
consumption for the production of other goods and
services, without subsistence production, without
black market)
13.10.2011 3Prof. Dr. Brigitta Herrmann
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1. How is the GDP measured?
GDP:
• 3 Methods of Calculation:
• Production
• Distribution
13.10.2011 4Prof. Dr. Brigitta Herrmann
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1. How is the GDP measured?
• Calculation of GDP:
• Production method: example Germany 2005 inbio €
Output 4,088.72- intermediate consumption 2,082.36
= gross value added 2,006.36
+ taxes less subsidies on products 218.04
= gross domestic product 2,224.40
13.10.2011 5Prof. Dr. Brigitta Herrmann
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1. How is the GDP measured?
• Calculation of GDP:
• Expenditure method: example Germany 2005 in bio €
Final consumption expenditure of households 1,306.98
+ investment 384.13
+ government final consumption expenditure 417.30+ exports 919.07
– imports 803.08
= gross domestic product 2,224.04
Y=C+I+G+X-I
13.10.2011 6Prof. Dr. Brigitta Herrmann
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1. How is the GDP measured?
• Calculation of GDP:
• Distribution method: example Germany 2005 in bio €Compensation of employees (residents) 1,137.64
+property and entrepreneurial income 576.05
= , .
+government taxes on production and importsless subsidies 207.94
+consumption of fixed capital 327.96
=gross national income 2,249.59
–primary income from the rest of world (balance)25.19=gross domestic product 2,224.40
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2. Understanding inflation rate
1. Inflation: persistent increase of prices
• Inflation rate:
= percentage by which prices of goods and
= rate by which the purchasing power of people
in a country has declined in a specified period
(month or year (expressed in an annualized
figure)
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2. Understanding inflation rate
• Calculation of inflation rate: price indices
• Consumer Price Index• Cost of Living Index
• Producer Price Index
• Commodity Price IndexFormula: Inflation Rate = (Po- P-1)* 100 / P-1,
• Po = present average price
• P-1 = price that existed last year
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2. Understanding inflation rate
• Causes of inflation:
1. Increase of money supplyor
2. Decrease of goods supplied
.monetary policy)
Supply of money is big compared to products one canbuy with the money
=> prices rise• High lending levels
• Declines in exchange rates
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2. Understanding inflation rate
Ad 2. Decrease of goods supplied causes inflation:
• Increases in production costs• Increases in labour costs
• Decrease in availability of limited resources (e.g.
food, oil)
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2. Understanding inflation rate
• Effects of inflation:
economic and social• Purchasing power decreases (problem especially for
low-income groups)
• Real value of money decreases=> effect on interest rates
=> effect on savings
=> effect on investments=> effect on employment
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3. Relationship between Inflation rate and
• Effects of inflation rate on interest rates:
• if inflation rate increases => interest rates will risebecause: people saving money want to be
compensated for losses in value of money due to
n a onQuestions:
• How fast is adaptation process?
• What other factors influence adaptation process?
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3. Relationship between Inflation rate and
• Effects of inflation rate on savings:
• if interest rates rise=> Savings will rise,
• if consumers are able to save money (not too
poor)• if inflation is not too high, if so
=> Savings decrease but shift to real assets
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3. Relationship between Inflation rate and
Effects of inflation rate on employment:
If wages have not adapted:=>Unemployment may be reduced (reduced costs
because of reduced real wa es
If wages have adapted (risen) and if investments arereduced
=> unemployment rises
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4. Budget Deficit
• Budget Deficit:
• Government Budget = summarized version of :• Anticipated revenues
and
of a government (formulated by the executive andpassed by the legislature as a legal document)Government Budget: focus on distribution of wealth for
• economic• political and
• social purposes
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4. Budget Deficit
• Budget Deficit:
• Public expenditures > public revenues⇒Must be financed by loans
⇒Interest rates on government bonds increase
Depending on types of expenditures:
⇒Employment might increase⇒Private investment might be crowded out
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5. Government Debt
Overall government debt
= accumulated debts• Problem: even if no new debts, overall debt is
existing debts
• Government debt should be seen in relation to
growth rate
• If growth rate is higher than real interest rate
=> not a big problem
13.10.2011 19Prof. Dr. Brigitta Herrmann