Pham Tran Chau Anh - Assignment 2 PDF

Preview

Summary

Assignment 2...

Description

MACROECONOMIC WRITTEN REPORT Macroeconomics 1 – ECON1192

S3695310 Lecturer: Thai NVH - Group 2

Macroeconomic - Written report | 2018

Fiscal Policy of Argentina Introduction The main purpose of this paper is discussing the fiscal policy of Argentina. It contains the Argentina macroeconomic snapshot, the analysis of the fiscal policy of Argentina, its impacts and the comparison with other countries.

Argentina macroeconomic snapshot The official name of Argentina is the Argentine Republic and it is the second largest country in South America. Argentina’s economy is one of the most powerful in the region. The economy depends mostly on services and manufacturing even though its agriculture has the largest grain productivity as well as being the second largest in cattle raising after Brazil (Eidt RC, Donghi TH. & Calvert PA 2018). Argentina is known as the world wealthiest nation with immense agricultural and mineral resources.

Argentina GDP growth and Inflation 50.00% 40.28%

40.07%

40.00% 30.00% 23.17% 20.00% 14.94%

20.92%

0.00% -10.00% 2007

25.35%

15.38%

10.13%

9.01%

10.00%

26.58%

23.70% 22.31% 23.95%

6.00%

4.06%

-1.03%

2.86%

2.73%

2.41%

-2.51%

-1.82%

-5.92% Inflation, deflator2011 (annual %) 2008 2009GDP2010 2012

growth 2015 (annual %) 2013GDP2014 2016

2017

Figure 1: GDP Growth and Inflation of Argentina from 2007 to 2017 (Source: World Bank) Overall, recently, GDP growth as well as the inflation of Argentina fluctuated dramatically. When the GDP growth turns negative, Argentina experienced a recession like in 2014 and 2016 and when the GDP growth is positive, Argentina’s economy was expanding. In 2009, Argentina could not avoid the financial crisis, which has appeared in the US and spread out all over the world. That was the reason why the GDP growth of Argentina reached the bottom (pg. 1 Pham Tran Chau Anh – s3695310 School of Business & Management

Macroeconomic - Written report | 2018 5.92%). GDP growth ranking of Argentina is 129th (World Bank), which is in the low ranking in the world. GDP inflation ranking of Argentina is 4th (CIA World Factbook). The inflation of Argentina is extremely high, recently at the top of the world inflation. Therefore, the purchasing power of a unit of the currency falls. In 2017, the strongest price rise was recorded for transportation, which is mainly because of the increase in the fuel cost, recreation and culture and household development (Focus Economics n.d). The central bank is attempting to keep the economy on a disinflationary way, with an objective of accomplishing a 5% rate quite a while from 2018 (Feldstein 2017).

Argentina Unemployment Rates 10.00%

8.47% 9.00% 8.00%

8.65%

7.84%

8.50% 8.30%

7.71%

7.18% 7.22% 7.10% 7.27%

7.00%

5.90%

6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Figure 2: Unemployment rates of Argentina from 2007 to 2017 (Source: World Bank) Unemployment rates ranking of Argentina is 106th (International Labour Organization). In 2017, the region having the highest rates is Buenos Aries, which is the capital of Argentina. However, a separation should be made between the city and the province, thinking about the urban rates in the previous, the rate checked in at 5.9 percent – lower than the national average – while the latter did as such at 9.2 percent. In concrete numbers, this implies the greater part a million people have no jobs in the biggest urban area in the nation (Bubble Staff 2018).

pg. 2 Pham Tran Chau Anh – s3695310 School of Business & Management

Macroeconomic - Written report | 2018

Argentina Population 45,000,000

44,271,041 43,847,430 43,417,765 42,981,515 43,000,000 42,539,925 42,096,739 41,656,879 42,000,000 41,223,889 40,799,407 41,000,000 40,382,389 39,970,224 40,000,000 44,000,000

39,000,000 38,000,000 37,000,000

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Figure 3: Population of Argentina from 2007 to 2017 (Source: World Bank) The population ranking of Argentina is 31st (United Nation). 92% of the Argentine population lives in the urban area and Argentina is a diverse country of immigrants, so the population with high knowledge and well-qualified will supply a high labor force to the firm. However, the population growth rates of Argentina is the lowest in Latin America (World Population Review n.d). Therefore, the population of Argentina will soon be the old population, which leads to the lower employee supply to the market. There is a relationship among GDP growth, inflation, population and unemployment rates. The population supplies the working labors to the market, the population is high, leading to the surplus in the labor supply. However, if the GDP growth is contracting, the firms will not immediately invest in new purchases. They will postpone hiring new employees until they are sure the economy will move forward, which leads to the increase in the unemployment rates, so without jobs, consumers have less to spend (Amadeo 2018). Therefore, it will discourage the economy, leading to the fall in GDP as well as GDP growth and the increase in the inflation. The most clearly figure is in 2016 when the GDP growth reached the bottom and the inflation as well as the unemployment rates reached peak.

Argentina Fiscal Policy

pg. 3 Pham Tran Chau Anh – s3695310 School of Business & Management

Macroeconomic - Written report | 2018 General government final consumption Budget expenditure $47,059,282,177 $52,492,054,200 -$5,432,772,023 $63,553,873,916 $53,918,788,600 $9,635,085,316 $76,331,000,000 $59,232,719,800 $17,098,280,200 $92,200,500,000 $61,437,671,500 $30,762,828,500 $111,658,500,000 $116,511,660,100 -$4,853,160,100 $153,108,100,000 $156,737,152,200 -$3,629,052,200 $154,531,600,000 $198,469,382,400 -$43,937,782,400 $213,581,700,000 $251,978,673,300 -$38,396,973,300 $275,943,500,000 $341,866,144,100 -$65,922,644,100 $341,684,800,000 $439,092,309,100 -$97,407,509,100 $416,961,600,000 $562,724,686,700 -$145,763,086,700 $577,467,060,000 $776,149,459,000 -$198,682,399,000 $734,578,650,000 $1,077,669,994,700 -$343,091,344,700 $995,383,800,000 $1,476,812,117,300 -$481,428,317,300 .. $1,912,374,618,600 .. Table 1: Tax revenue, Government consumption expenditure and budget situation of

Series Name 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Tax revenue

Argentina from 2003 to 2017 (Unit: Current LCU) (Source: World Bank) The Ministry of the Treasury of the Argentine Nation is in charge of the fiscal policy. Overall, Argentina is facing the deficit situation in the past 15 years, except from 2004 to 2006 when its budget is a positive number. Argentina keeps the deficit because of the time inconsistency, leading to the expansionary fiscal policy. According to OECD, the tax revenue of Argentina mostly come from taxes on income, profits and capital gains. Argentina government focuses on public spending, which is the reasons why between 2007 and 2014, Argentina was encountered as the second-largest increment in the region, especially, in 2015, Argentina public spending was the highest in the region (OECD n.d). The quality of life in Argentina is the highest among the South and Latin America, maybe that is the reason why people in Argentina tend to spend more than save. However, inflation and high taxes are two relatively factors that hide an unnecessary public expenditure that has acted as a brake on the economy because it is not considered as a service to encourage financial action, but as an end of itself. The primary public expenditure excluding the cost of debt is doubled between 2002 and 2017. The three items made up the largest proportion of public spending were salaries, social security and subsidies to the private sector (Lacalle 2018). Argentina is now faced with the situation that it has to spend a large amount to pay for the rise in public employment. pg. 4 Pham Tran Chau Anh – s3695310 School of Business & Management

Macroeconomic - Written report | 2018

AD – AS diagram P

LRAS SRAS Crowding out effect

SRAD1

MultiplierSRAD effect 2 SRAD Capacity In short run, the Argentine government increase in the expenditure, especially on salaries, leading to the decrease in tax, the Argentine will bring home more, followed by the rise in consumption. Hence, the Multiplier effect is kicked off, the Argentine spend more than save, the MPC of Argentina is high. Therefore, the multiplier effect shifts the demand (SRAD 1) further to the right and the GDP will grow. However, there is the crowding-out effect in the fiscal policy of Argentina. The government expenditure increases, the demand for money rises, leading to the decrease amount of money in private firms due to the high interest rate, leading to the difficulty in borrowing, followed by the fall in the firms’ investment but the government still spend a large amount to subsidy the private sector. The crowding out effect shifts the SRAD 1 slightly to the left to the SRAD2, which was followed by the decline in GDP. In short, Argentina is affected by the multiplier effect more than the crowding out effect, so the GDP still increase. In long term, the Argentine government has spent a large amount on public spending. Also, the Argentina government expenditure focus on developing their labour capital, physical capital and technology. The education in the state institution is free as well as it has the most global tech hub, so it is a good thing of the Argentine government to spend. However, the Argentine government should be aware of the inflation rates, the unemployment rates as well as the interest rate and monetary policy to avoid the decrease in the GDP.

pg. 5 Pham Tran Chau Anh – s3695310 School of Business & Management

Qty

Macroeconomic - Written report | 2018

Comparison with other countries Argentina

Thailand

Vietnam

Greece

GDP growth ranking

129th

78th

4th

149th

Inflation ranking

4th

198th

115th

220th

106th

212th

197th

30th

Population ranking

31th

20th

15th

82nd

Recently tax revenue

Increase

Remain Stable

Decrease

Increase

Unemployment rates ranking

Tax on income, Tax revenue mostly

Corporate

profits and

Income tax

capital gains Public spending

Military (from

(salaries, social

2009 to 2014)

security and

Social Utility

subsidies to

(from 2015 to

private sector)

now)

save more or consume

Spend more

more Budget situation Fiscal policy Multiplier effect is stronger or Crowding

comes from

Government spending mostly on

income tax and

Income tax

VAT

Recurrent

Human and Natural

expenditure

resources

Save more

Save more

Save more

Deficit Expansionary

Deficit Expansionary

Deficit Expansionary

Surplus Contractionary

Multiplier effect

Multiplier effect

Multiplier effect

Crowding out effect

Population tend to

out effect is stronger

Reference Amadeo, K 2018, What Is the GDP Growth Rate?, The Balance, retrieved 7 September 2018, available link: https://www.thebalance.com/what-is-the-gdp-growth-rate-3306016

pg. 6 Pham Tran Chau Anh – s3695310 School of Business & Management

Macroeconomic - Written report | 2018 Bubble Staff 2018, Unemployment Rate Drops to 7.2 Percent in Argentina in Last Quarter of 2017, The Bubble, retrieved 7 September 2018, available link: http://www.thebubble.com/unemployment-rate-drops-to-7-2-percent-in-argentina-in-last-quarterof-2017/ Eidt RC, Donghi TH & Calvert PA 2018, Argentine Republic, ENCYCLOPÆDIA BRITANNICA,

retrieved

7

September

2018,

available

link:

https://www.britannica.com/place/Argentina/Economy Feldstein M 2017, Argentina and inflation: what the rest of the world can learn, World Economic

Forum,

retrieved

7

September

2018,

available

link:

https://www.weforum.org/agenda/2017/01/argentina-and-inflation-what-the-rest-of-the-worldcan-learn Focus Economics n.d, Inflation in Argentina, Focus Economics, retrieved 7 September 2018, available link: https://www.focus-economics.com/country-indicator/argentina/inflation Lacalle D 2018, Argentina: Why Tax Revenues Decrease As Taxes Rise, Misses Institute, retrieved 7 September 2018, available link: https://mises.org/wire/argentina-why-tax-revenuesdecrease-taxes-rise OECD.org n.d, Government at a Glance Latin America and the Caribbean 2017, OECD and IDB, retrieved 7 September 2019, available link: https://www.oecd.org/gov/lac-argentina.pdf W World Population Review n.d, Argentina Population, retrieved 7 September 2018, available link: http://worldpopulationreview.com/countries/argentina-population/

pg. 7 Pham Tran Chau Anh – s3695310 School of Business & Management...