Macroeconomics Essay: Calculating GDP Growth Rate In France.

Analysis of Production

Discuss about the Macroeconomics Calculate GDP Growth Rate.

France is one of the strongest economies in Europe and also the world as whole. It has a mixed economy with both private and state enterprise being of a substantial amount and is also characterised by a significant amount of state intervention. It is the second largest economy in Europe, second only to Germany, and contributes about one fifth to the Euro Area Gross Domestic Product. It is also the fifth largest economy in the world and the main contribution to this is the services sector in France which contributes over seventy percent of the GDP ("France Economy - GDP, Inflation, CPI and Interest Rate", 2017). In terms of manufacturing, France is known for its automotive and railway manufacturing as well as luxury goods like cosmetics, designer clothes and handbags. Its capital, Paris is the commercial and cultural hub of the country and a major tourist destination, being one of the most famous cities in the world. At present the French economy has been in a slump with the growth being 0% in the second quarter of 2016. A continuation of the previous slump the country has been in, more factors like nationwide strikes in oil plants and nuclear power plants, terrorism attacks and even the outrageous prices of sports competition tickets have contributed to the reduced spending in the French Economy. This though comes at a time when the French economy was said to be reverting as in the first quarter of the year it was actually growing and looked to be on track to returning to its 1.5% per year GDP growth it was achieving before.

To analyse the production in a country one of the best ways is to look at the GDP of the country. GDP or Gross Domestic Product of a country is the total value of all the goods and products that has been produced in the country at a certain amount of time (Mankiw, 2008 ). The real GDP of a country is valuing these goods based on a base year so that they are inflation adjusted. This measure helps in describing the economic performance of a country and is one of the most important indicators of the health of a country. This helps in determining various other economic indicators while also being effective to give better policies from the government to the people (Picardo, 2016).

Analysis of Employment

Taking a glance at fig. 1, it can be seen that the GDP at market prices (constant 2010 US$) from 2006 to 2015 has a more or less increasing linear slope with obviously one steep downturn in 2009. In 2009, France entered the worst recession the country had faced since World War II ("French economy returns to recession - BBC News", 2013). It had a further bad period from 2012 onward which leads to a trough where thought the GDP is increasing it is not increasing as much as before. This was when the country fell again into recession. From the figure it looks to have recovered slightly by 2015.

Another way to judge the performance of a country is through the real GDP per capita which the inflation adjusted amount of GDP per person in a country (Pettinger, 2011). It measures what the average person in the economy produces. This measure is also useful in accessing the economic health of a country and also simultaneously helps in other economic indicators. A huge advantage of such a measure is that it makes countries directly comparable, thus leading to a greater degree of use when trying to analyse things on a global scale. This is also why it makes much more sense to use it in development and poverty indicators especially during inter-country comparisons as they are able to show a truer picture than the GDP.

From Fig. 2 it is clear that the GDP per capita in France has never been below $40,000 and is about the 26^th highest GDP when measured by purchasing power parity in 2015 ("Report for Selected Countries and Subjects", 2016).  However the GDP per capita graph follows the same pattern as the GDP graph with it having a dip in 2009 and then recovering till 2011 and then falling again 2012 onwards ("French economy falls back into recession - France 24", 2013). France has been in a state of economic turmoil with some better prospects towards the end of the period.

The rate of growth of real GDP is the difference between the real GDP of two years as a fraction of the GDP of the previous year. It is a measure of how fast the economy is growing. If it is positive that means the economy is growing and that if it is positive that would mean that the company is in recession or is about to be in recession. This measure helps in determining how well the country is doing as helps in attracting businesses which want to invest in economies that are booming. It also helps guide the policies of the government regarding maintaining or increasing these economic rates (Amadeo, 2017).

The Economic Situation in France

From fig 3 it is clear that the growth rate which was above 2% in 2006 started dipping drastically with the onset of the 2007 Global Financial Crisis and continued to fall at alarming levels finally becoming negative in 2008-2009 thus plunging the country into an economic crisis. It had then improved it 2010 but again started falling in 2011 and was about 0.18% in 2012 at its lowest in this stretch and has then been growing very slowly and the end of 2015 was around 1.3%.

The economic situation of France is pretty dire with the country suffering a recession in 2009 and again in 2012. In the 2009 recession France was hit extremely hard with record unemployment with 412000 jobs disappearing and with high inflation of 0.8% ("France saw worst recession since 1945 in 2009", 2010). The European Union had pledged 200 billion Euros to counteract the effects of this crisis.  But after a year of this France managed to come out of recession owing to the stimulus generated by public sector investment by the government, the role played by banks which remained strong even in these times along with the general recovery of the world after the global financial crisis around this time buoyed up France’s economy ("Germany and France edge out of recession", 2009). However in spite of these things the recovery was expected to be sluggish. No one predicted that so soon France would be falling into another recession. This was mainly due to the Eurozone falling into a recession and pulling France down with it from about. As one might recall this is about the time when the Greek Crisis started being a prominent problem for the EU with economic crisis in other countries as well (Pettifor, 2013). The French government signed the “Pact of Competitiveness “which proved to be pretty unpopular and were in the end austerity measure no one favoured. It increased the value added taxes in the country and also reduced public expenditure by about 1 billion euros. At about the same time the President of the country had decided to reduce the corporate tax.  To bring the economy out of this, The European Central Bank had cut its interest rates to 7.5% so as to stimulate growth in the economy. They had also started wage cuts so as to reduce spending rather than use supply side reforms as used by other countries like Spain to come out of this crisis. Austerity in such a way has eroded the tax base and the budget deficit if the country has been heightened (Evans-Pritchard, 2014). Two thirds of the measures that were implemented were for boosting revenue and one third at reducing spending in the economy. However since 2015 due to increase in business activity there has been again an upward turn in the growth rate of the economy.

Unemployment rate may be defined as the percentage of the labour force who is interested to work but are unable to do so. Unemployment is mainly of three types – cyclical, frictional and structural unemployment. Structural unemployment is the unemployment that is brought about by wage rigidity and job rationing in the economy. Frictional unemployment is the unemployment that occurs because it takes time for a worker to find the job best suited to their tastes and skills. Cyclical unemployment is the unemployment that is due to the short run economic fluctuations. It represents the deviation of the unemployment rate from the natural rate of unemployment which is the sum of the frictional and the structural unemployment (Blanchard et al. 2013).

As it is seen in fig 4, the unemployment of the country took a dip around 2009 but has been rising ever since with it being greater than 10% from 2012. It took a dip somewhere in 2013 but again has been rising.

The types of unemployment that is seen in the French economy can be stated as structural unemployment, frictional unemployment, cyclical unemployment, seasonal unemployment. Seasonal unemployment is when a worker is required to work only in a certain season, such as in agriculture or in retail during holiday season. This type of inflation is prevalent in France because of the amount of agriculture based industries present in France. Frictional unemployment is very high in France due to the constant downturns of the economy and makes up the biggest of the variable sector of the unemployed. This is the people who are out of a job due to the economic downturn in France. Due to there being a dearth of jobs, there is frictional unemployment such that students just passing out are not able to get jobs to match their skill and have to be trained further. As France has high tax levels and burdensome regulations, the structural unemployment in the country remains.

The causes of unemployment in France can be traced to that the strong Euro makes it tough to export technology. There are also very strict labour laws and inefficient social security problems which make unemployment a chronic problem in France. In forms of government support there is the PARE (Program for Assisting a return to Employment) . By this the person must undergo tests to prove his/her work skills, go through additional training and work experience as and when required by the state employment agency (Minier, 2015). However after a year the person must accept whatever job is offered. Along with that France has recently reformed its labour laws so as to help decrease its record high unemployment which has plagued the country in recent years.

An increase in the general level of prices in the economy is in known as inflation. The difference in the price level of two years expressed a as fraction of the price level of the previous year is called inflation rate. Inflation rate is an indicator of the purchasing power of the economy. It is also useful in framing the monetary and fiscal policy of a country as it affects each and every person living in the country (Dornbusch et al., 2014). The two types of inflation are demand pull inflation and cost push inflation. Demand pull inflation is the inflation that results from the excess of aggregate demand over aggregate supply. Similarly, cost push inflation results from the increase of aggregate supply relative to aggregate demand.

As seen in fig. 5, the inflation in France is usually very low ranging from below 3% to about 0 in 2015. It had also increased drastically around 2009 and then kept increasing tp above 2 and then fell again from 2012 as soon as the economic turmoil started with France sliding into recession.

France has very low inflation keeping in turn with the low growth rates of the country. Inflation so low is the sign of an excessively weak economy. Many retail sectors feel the need to discount heavily so as to sell goods and this is a negative sign for the economy. This might also lead to low spending in the economy and thus affects the aggregate demand. The European Central Bank follows a policy of inflation targeting aims to improve the inflation rate by keeping it just below 2%. To do this they are increasing the repurchase rates so as to drain the money from the economy.  To help the growth in the economy and prevent disinflation the French government has followed a policy of structured government spending with no new increase in taxes  and the Responsibility and Solidarity pact to be fully implemented by both households and companies ("French inflation turns negative - BBC News", 2015). With more business investment and spending these rates can be improved.

Conclusion:

France has been a strong economy through recent times and is one the seven leading economies of the world. It has however faced some problems in recent times due to the Great Recession in Europe and the Financial Crisis of 2007. It has had a very poor performance in terms of production in the recent years with the economic slowdown in the country but it might finally be the time when things are turning around for France. It has also had very high unemployment levels, again partly related to the two big shocks. Unemployment in France has always been on the higher side but now finally the unemployment levels have come down to what is the European average. The inflation rate is also extremely low signalling the state poor state of the economy and its growth. Steps are being taken to improve the GDP by fiscal and monetary policies and thus the inflation by the European Central Bank who centres their policies on the target inflation. France must look into austerity and that too sustainable austerity while also looking into supply side reforms to try and boost growth in the economy. It should also focus on training its unemployed instead of relying on handouts so as to help reduce unemployment and to come out of the economic slump.

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