Countrys’ economic performance

Countrys’ economic performance

1. The Inter-temporal Model (Germany)
2. Is Germany a high- or low-income country?

Based on the classification of the World Bank, Germany is a high-income country. The country’s GDP, together with the level of imports and exports, will be used to elaborate on the World Bank’s classification. The data obtained from world bank shows that Germany exports more than she imports, with a significant difference between the imports and exports. The data collected shows that 1990 was the only year that imports exceeded exports.Since then, the country’s level of exports has always been higher than that of imports. The GDP growth rate is another indicator of the country’s economic performance.Germany has a high per capita gross domestic product, and the GDP has been increasing steadily every year. This growth implies that the country has been producing more valuable goods and services.

GDP= Private consumption + Business Investment + Government spending+ Net exports

(C + I + G+ (X-M))

1. Real interest rates.

Germany’s top ten trading and investment countries in this study were the Netherlands, Luxemburg, United States, United Kingdom, Switzerland, France, Belgium, Italy, Australia, and Japan. In comparing the real interest rates of these countries, six of them countries were incomparable. That is the Netherlands, Luxemburg, Switzerland, France, Belgium, and Italy. On graphical illustrations, Germany’s real interest rates and the six countries lie on almost entirely different planes. They seemed to take an almost similar trend, which was a different case from the other countries that could be compared. However, the data obtained, six of these countries were not consistent with the theoretical prediction of the inter-temporal model, for a compatible time of 30 years.

1. The inter-temporal model predicts that the country can lend or borrow with other countries, at a time-varying real interest rate. In our case it the data was not consistent with the inter-temporal model. The possible reasons for the inconsistency may be the different lending rates of different countries since countries’ terms and conditions have attached to lending and borrowing rates differ. If there is no set limit for lending and borrowing in these countries, their real interest rates will automatically be incomparable. Different foreign exchange rates may also contribute to the inconsistency.
2. Exchange rates analysis. (Canada and United States)
3. Annual data on inflation rates and the exchange rates between Canada’s local currency and US dollars were collected from the World Bank, and the data ranged from 1990-2019.
4. On calculating the percentage change on Canada’s local currency units against USD, the analysis showed that the most significant appreciation occurred in 2015; the country experienced a percentage change of 15.7466 from the previous year. On the other hand, the most substantial depreciation occurred in 2010, which amounted to a 10.7643 percent change.
5. The difference in annual inflation rates between the United States and Canada was computed in Excel, and the most significant difference amounted to 2.436 and resulted from 1994 data.

• The results in (i) differed from those of part (ii). On calculating the PPP, it is clear that PPP holds in the long run in this case. After creating a new column showing the magnitude of the deviation from relative PPP, the results indicated that there were years when the dollar is overrated compared to Canada’s LCU (when the PPP<1). P1 was the Canadian inflation rate, while P2 was the inflation rate from the United States. Also, the US dollar was overvalued in 2015, since the PPP was 9.45. Having a PPP of 9.45 implies that Canada’s local currency severely dropped.

1. The possible reasons for the PPP deviation were: varying inflation rates were the main determinants of PPP. Therefore, PPP can be reduced by levels of inflation. However, Relative PPP suggests that countries with higher inflation rates have underrated currency (Sheng, 2019); Changes in exchange rates as the varying exchange rates contribute to budgeting problems, profit planning, and profit planning (Yong et al., n.d.). They thus could have led to the deviation of PPP.
2. Summary of an event that might be believed to have possible effects on the 2015 states of Canada.

In 2015, the prices of oil and other commodities rose, bringing down the Canadian stock market. A barrel was going at 35 US dollars, and the producers had to cut production to avoid losses. Also, the Canadian dollar dropped the same year, and this drop only benefited the Canadian investors with US stocks, as the American shares were modest during this period. Such a case leads to a reduction in the country’s GDP, as they will force spending of power and the country’s national incomes to be cut, and also, people will reduce their spending. When prices of crude oil go high, most commodities such as household products, public transport, healthcare, shipping, and even shopping goes high, since their production and delivery depend on power usage. Therefore, when the economy weakens, people are likely to spend on what they necessarily need. With the dropped value in the country’s currency, the citizens will be afraid to run projects that require crude oil, especially if they require funding from the banks, as the banks will charge them more than the usual price. However, investors who need to capitalize on the affected sector (in this case, the power sector) are encouraged not to, since they might take advantage of the situation through bargaining. Instead, these investors should consider investing in organizations or firms with secure administrations and balance sheets, as this would help the country regain its power in oil production.

The predictions of this event apply in reality since the data obtained on exchange rates showed that Canada experienced the most significant percentage change of 15.7 in 2015.

The US dollar was overvalued (it was strong compared to the Loonie), which, with other factors, contributed to the fall in Canada.

References

Sheng, J. (2019). Relative Purchasing Power Parity (RPPP). Retrieved from: https://www.investopedia.com/terms/r/relativeppp.asp

Wong, C. (2015). Canadian stock market down in 2015, struggle expected to continue in 2016. The Canadian Press. Retrieved from: https://www.huffingtonpost.ca/2015/12/24/2015-a-tough-year-for-stocks-in-canada-2016-expected-to-remain-challenging_n_8873936.html

Yong, et al., n.d. Causes of Deviations from purchasing power parity. Multinational Business Review. Retrieved from: https://www.questia.com/library/journal/1P3-9302211/causes-of-deviations-from-purchasing-power-parity