Good Example Of Evaluation Of An Economic Article Essay
The article that we would analyze and evaluate in this study came from Bloomberg. We would discuss general economic principles and particular macroeconomic indices and its relation to the national circumstances that are featured in the chosen article. From here, we would come up with a fitting evaluation, decisions, and forecasts.
David Biller (2015) of Bloomberg Business covered the economic growth outlook of Brazil for the year, according to its analysts. Despite being the world’s second-largest emerging economy, its analysts lowered its growth outlook. Meanwhile, the projection for consumer price would increase. This has been the statement for 10th week in a row. The Central Bank raising its rates in order to curtail beyond target inflation seemed to be the key factor that encouraged such outlook (Biller, 2015).
The analysts further detailed on the country’s gross domestic product, indicating a -0.66% contraction from -0.58%. Inflation, on the other hand, was raised to 7.77% from 7.47%. Moreover, Brazil is now on its second year of confronting stagflation due to raising taxes and cut spending. These financial ruling has been reversing the deficits on budget. The currency is experiencing a fall while borrowing hikes costs. With this, both the investors’ and the consumers’ economic confidence has been dwindling (Biller, 2015).
The country’s inflation last year rushed from 7.14% to 7.7%, the fastest stride in almost a decade. With this, the Central Bank pegged a 4.5% annual inflation. This is equivant to 2%, more or less. Consequently, fiscal legislators increased the interest benchmark to the highest percentage of 12.75%. Traders expected the additional half-point growth. Economists, on the other hand, expected a 13% short-term interest rate at the end of the year. Overall, Brazil had a 0.1% growth in the third quarter from 0.6% in the second quarter of 2014. It drew the country out of recession during the first half (Biller, 2015).
We infer that every factor has roles to play in any economic condition. Yet in this study, it would be clearer to analyze the selected factors. The evident macroeconomic indices utilized in the article were Gross Domestic Product or GDP, Consumer Price Index or CPI, and Consumer Confidence Index or CCI. As for the economic principles, the principles of Anticipation, Contribution, and Substitution can be related to the article.
The Gross Domestic Product in the article pertains to the entire market value of goods and services manufactured strictly within Brazil in a particular duration. This includes the foreign companies’ production in Brazil, but excludes the production by domestic companies abroad. The factors that influence the GDP are the net exports, investment, consumption, inventories, and government spending. An increase in GDP simply means a growing economy. In turn, it would attract more investments that strengthen the currency (Alpari Limited, 2015).
The Consumer Price Index, on the other hand, quantifies the market prices through the movement in cost of the consumer goods and services given a particular period. The consumer goods and services range from food and clothing to utilities and educational expenses. In this regard, it could be utilized in the measurement of inflation. Likewise, the poverty threshold and the budget allocation could be identified here. Nonetheless, CPI does not include discounts and price fluctuations. When CPI increases, interest rates also increase, attracting more investments (Alpari Limited, 2015).
The Consumer Confidence Index gauges consumers’ confidence in the economy. It surveys consumers’ savings, spending behavior, as well as labor market, and present business conditions. The latter makes up 2/5 of the index, along with the expectations on business conditions. The rest weigh labor market and family income. When CCI increases, there is a favorable outlook towards the economy that strengthens the currency (Alpari Limited, 2015).
The principle of anticipation states that value is basically a task of current worth in relation to future benefits. People pay by using the money they have now in order to acquire the benefits that may be in the likes of intangibles, with the hope of producing more money in the future. Moreover, the principle assumes that the past is merely relevant due to its tendency to give signs on what to expect in the future. The contribution principle, on the other hand, states that the component value is a task of its contribution to the entire component instead of being separate. Additions do not necessarily equate to contributory value. Other times, contribution value exceeds cost.
The other principle that is relatable to the article is substitution. It is the system of determining alternatives in satisfying similar needs and wants. What happens is that when one of the similar goods increase in price, the demand for the other goods would likely increase. It has the capacity to keep the market balanced (CTR, 2010).
In the article, it indicated a GDP movement from -0.58% to -0.66%. This means that the analysts of the Brazilian economy have seen a negative growth. Moreover, they have projected a further economic downturn for the coming year. Based on the definition, an increase in GDP would attract more investment and strengthen the currency. Unfortunately in Brazil, the reverse is seen to occur. With this, investments would be evasive and the purchasing power of the currency would be weak. This would give rise to inflation, which in the article is indicated to move from 7.47% to 7.77%. Apart from the weak currency, it is important to note that inflation would also mean an increase in prices. This is where the economic principles come into play, reinforcing the movements in the rest of the indices.
Through the principle of anticipation, people have been considering the past in the hope of gaining more benefit. Likewise, they use the past to tread through the future. The article composes of a ten-week period of constantly decreasing numbers. With such reflection of the country’s economic climate, people would also perceive a decrease in economic condition in their own circle. Eventually, people act on this perception, leading to the manifestations of the contribution and substitution principle, especially in CCI.
The indices move according to the principles. The anticipation towards constant decreasing numbers dissolves the confidence of people as well as the investors towards the market. Hence, the article indicated a dwindling CCI. Without the confidence of the consumers and investors, they would hesitate to out their money. Certainly, the potential profits of businesses are threatened. It is likely that only a few consumers and investors would be willing to risk their money in gaining values, whether from the anticipation or the contribution principle.
For the businesses to meet their operational costs, they would have to find a way to reach their target profit. With a few consumers and investors in relation to the regular prices, they would certainly be short of the target. There would be few consumers who would buy the goods that the businesses sell. There would also be few investors who would support the ventures and let businesses borrow. Somehow, borrowing is also the investors’ business. Thus, given the dwindling economic condition, prices would have to be raised, including the borrowing rates, to survive. These rising prices of goods and borrowing rates would reflect on the CPI where inflation is measured.
The contribution principle in the face of such dwindling economic condition would seem to worsen CCI. When people buy goods and services, they pay for the cost and the contributory value. This value could be really beneficial or of little help for the consumers. A consumer bought an estate with a grassy backyard, for example. After a while, he might want a pool that costs thousands of dollars to build. Yet, this would only add a thousand to the value in relation to the estate. Due to inflation, that consumer is limited to paying for the staggering costs, let alone the contributory value. In this regard, the consumer would not be encouraged to spend, given the little to no value received on the purchases.
The substitution principle, on the other hand, has a different way of affecting the indices. Goods and services satisfy the needs and wants in the market. Yet, the businesses operating to deliver these goods and services have their own unique business systems and background. Some businesses would have to raise prices abruptly following the inflation while the others do not. The businesses that raise prices would be substituted for the ones that did not. This is because the consumers would be able to cater to their needs, wants, and more, given the money they have .From here, many effects could be pointed out.
For one, the businesses with raised prices would have even fewer consumers. Meanwhile, the businesses with maintained prices would have consumers experiencing the contribution principle. Since alternatives are available, consumers’ would still continue spending. However, the business conditions, particularly the quality of value they would be receiving, could be compromised. In any circumstance, this principle would find its way to haunt the indices. While the consumers still spend, it could torment the GDP through lower income amounts from relatively lower prices of the substitute goods purchased. The CCI is also in trouble through the compromised business conditions.
Putting CCI aside, the GDP alone would affect CPI. In this regard, the indices and the principles are enchained to each other, building an economical domino effect. Basically, a bad GDP would spoil CPI and CCI. An uncontrollable CPI would destabilize GDP and CCI. An uncertain CCI would make for an unattractive GDP and CPI. But of course, the GDP encompasses everything as stated in the definition.
These relationships would be able to tell us that the country the article pertains to, which is Brazil, is indeed experiencing an economic challenge. Nonetheless, it has reported that inflation is the one to blame. Raising rates is simply a response to regulate this circumstance. But as we have discussed, the indices behave like a domino effect. One response would not seem to solve this. The effort must be simultaneous. Knowing the relationships of the indices and the role of the principle could be utilized to work in favor of the country. If done right and even if a hint of confidence shows up in the index, then we could expect a more controlled CPI and an attractive GDP.
Alpari Limited. (2015). Macroeconomic indicators and indexes. Retrieved from http://alpari.com/en/analytics/fundamental_analysis/macro_indicators/
Biller, D. (2015). Brazil analysts lift 2015 CPI, cut growth estimate for 10th week. Bloomberg Business. Retrieved from http://www.bloomberg.com/news/articles/2015-03-09/brazil- analysts-lift-2015-cpi-cut-growth-estimate-for-10th-week
Connecticut Association of Realtors (CTR). (2010). Economic principles. Retrieved from http://edu.ctrealtor.com/unprotected/Ch04.pdf