Principles of Economics Essay

Italy is one of industrial countries in the world in European. According to Central Intelligence Agency (CIA) (28 May 2009), Italy has two sections of economy; one is developed industrial north and less-developed with high unemployment in south. In 2008, the unemployment rate in Italy was estimated with 6. 8%, especially in agriculture. In the current financial crisis, many companies get stuck in financial difficulties so that they could not provide work and pay enough salary for employees. It leads to employees dismissal and workers become unemployment. In some other cases, people lose their jobs by their skills are not enough with work requirement and by many unpredictable reasons, namely natural calamity, earthquake, tsunami. Unemployment is one of the most popular problems in many countries all over the world. High unemployment rate makes bad influences on not only national economy but also living condition of citizens. People are willing to work but they can not find any job. They would have to reduce their demands so that productivity of firms also decreases. Unemployment also affects to some other factors such as health, education, insurance, etc. In many countries, the Government tries to control unemployment rate effectively. Because of unemployment situation, the Government has to spend more money on investing and purchasing goods and services made by firms to increase productivity in a short time. This section called Government expenditure or Government spending. The more the Government spends on firms, the better the company could be. Moreover, the Government also has to spend a huge amount of money on building schools, hospitals and improving traffic system per year. Especially, the Government would be in charge when there is any problem that influences civil living, such as poverty, communicative diseases, natural disasters and other social welfares for orphan children and old people. SUMMARY OF THE ARTICLE: An earthquake in Italy. â€Å"Death in the mountains† The article is all about an earthquake happened in L’Aquila, Italy recently which caused at least 250 cases death; over 1,000 injured, a loss of 39 habitants of Onna single village and 13,000 buildings damaged, (included the historic and artistic monuments). Besides, there is 17,000 people became homeless and the number of those who are unable to return to their homes until having been inspected is perhaps as many as 70,000. These numbers show that Italy in general and its economy in particular is facing a big trouble. How does Italy deal with this? Mr Silvio Berlusconi, the Minister of Economy and Finance of Italy firstly announced a dispatch of 14,500 tents for the homeless after touring to the area and those people are being cared for by the government. He also decided to decline offers of foreign help despite the magnitude of the damage is daunting and the public debt is exceeding the annual GDP of Italy. Besides, he intended to tap European Union funds as well as spending some cash for the construction project as a response to the economic crisis. UNEMPLOYMENT: Unemployment is simply known as people who are at the work age but currently jobless, those who are able and willing to work but cannot find a job or those who quit their job or being fired for some reasons. High unemployment makes bad affect not only for the living condition of people but also for the national economy. There are two types of unemployment: †¢ Disequilibrium unemployment is which happens when the average real wage rate is higher than the point that equates the aggregate demand and the supply of labour. †¢ Equilibrium unemployment is which happens when there are people unable or unwilling to find jobs. Applying to Italy economy, according to Italica news, the unemployment rate in Italy is quite high, 7. 1 percent in quarter 4 of 2008. And as mentioned above, the recently earthquake brings Italy a big trouble that it killed people, destroyed their homes, work places, and thus, people suddenly become homeless, jobless. This not only affects to the living of people but also leads the economy of Italy into deep recession. Unemployment occurs. Italy case of unemployment is type of disequilibrium unemployment: the earthquake destroyed the work places, people obviously lose jobs, besides, when the buildings collapsed or are damaged, firms have to spend money on rebuild and repair things, thus there will be a cut back on production and on the number of labour (demand-deficient) and as a result, the number of unemployment goes high (supply is higher than demand), there is surplus of labour in Italy. Secondly, this case can also be considered as frictional unemployment (a type of equilibrium unemployment) because people are not voluntarily leave their jobs but they are made redundant and losing their work places. In addition, using the circular flow of income will help explain better how the earthquake affects the economy of Italy. When people become unemployment, they will tend to cut back their consumption (domestic consumption goods and service decreases), start saving, thus, the firms lower their productivity (national income decreases, net saving increase). The Government will decreases taxes (net taxes decrease), in contract, to rebuild things, the investment and government expenditure will increase. The export expenditure and import expenditure will decrease because earthquake affects a lot on the tourism of Italy as it destroyed many ancient structures of Italy and make this place a mess. (Y) (C) (I) (G) (X) (S) (T) (M) SHORT-TERM AND LONG-TERM EFFECTS OF EARTHQUAKES ON ITALY’S ECONOMY 1. Short-term effects †¢ Demand Curve P Supply curve shift P1 Equilibrium P2 New Equilibrium New demand curve Demand curve Q2 Q1 Q Actually, because of strongly earthquake destruction, citizens’ lives are affected. They live essentially base on grants and money that draw from the bank. The demand will decrease and curve shift to the left side so that make a new lower equilibrium. In this difficulty, the company cannot prevent the business because people don’t want to spend money. This change will make a worse effect to economic that still got lots of problem. †¢ Circular Flow of Income Corruption (I) (G) (X) (Y) (C) (S) (T) (M) Transfer Payments Corruption Properly, the earthquake effected directly and strongly to economy of Abruzzo region as well as GDP of Italy in 2009. Apply to the circular flow of income: Firstly, people lost their houses and properties so that the consumption of goods and services will decrease; after that the national income also decreases because firms were collapsed by the earthquake destruction and the demand is lower. Firms would produce less bring the price to higher. Secondly, the saving will decrease at the accidental region because people do not have so much money and increase in another places because the price is higher, people frequently save money. Due to the falling of demand, banks and investors will keep money, spend less into the investment. Thirdly, government expenditure must to spend a huge amount for rebuilding the infrastructure, namely public transportation, pipelines, and electricity. Moreover, the transfer payment is spent on unemployment, finding death and survivors under the ruins, relieving homeless people, providing drinks, food and medical treatments. After the earthquake, the firms fell down; many jobs lost; L’Aquila is the old city with famous architecture, the tourism is heavily affected so the taxation will decrease. Moreover, the corruption happened that make the circular flow of income become smaller and smaller and could be broken. To sum up, the circular of income is directly affected by earthquakes as well as natural disasters. The solution for that problem still has many barriers; Italy government and President Berlusconi must work totally hard. 2. Long-term effects. Earthquake directly affected certain macroeconomics variables include natural resources, physical capital, human capital and technology. Mostly, the negative impacts will be set on the short time, but positive influences also are classified permanently. First, the natural resources is destroyed that make bad impacts the economic depend on tourism like L’Aquila shortly, but in the long-term, it contribute new landscapes naturally in attracting people to come. Second, the physical capitals are collapsed and governments, investors will put money to build new ones fast and strongly replace the old. For example, President and parliament plan to build â€Å"British-style† new town in L’Aquila, make it more modern and ready to develop. The infrastructures will give people the jobs in building and fixing. It affects on human capital who are unemployment and poverty because of the disaster. Last, government will spend more to extend the forecast systems, make it become more accurate and faster in noticing the earthquakes. Definitely, negative or positive effects depend mostly on circumstances. With the high rank of corruptions, public debts and the downturn of national economy; Italy will make lots of efforts on turn round the development and increase % GDP. CORRUPTION: Corruption is a fact of life around the world, appears in all countries with low, medium or even high-income economy. Corruption leads to inequality, wasted resources and wasted public money. Corruption emerges one of the most serious problems within Italian economy besides high rate of unemployment and public debt, and it is related intimately with criminal organization known as mafia. There are some different types of corruption such as bribery, blackmail, tax evasion, official misconduct, etc. (Independent Commission Against Corruption. ) but within this work and the given case study we just mention corruption in Italian public works. Transparency International’s 2008 Bribe Payers’ Index found that public works/construction was the sector most vulnerable to corruption in emerging economies worldwide. It is really difficult to measure exactly the level of corruption in a specific country since the amount of money involved is not reported. All data used to estimate corruption in this work is based on the figure provided by Transparency International (TI), the global civil society organisation bills itself as a leader in fighting against corruption. TI uses CPI (Corruption Perception Index ) rank countries in terms of the degree to which corruption is perceived to exist among public officials and politicians. The CPI draws on different polls and surveys from more than ten independent institutions, for example, World Bank/European Bank for Reconstruction and Development, World Markets Research Centre, International Institute for Management Development and so on. Those surveys are also carried out among businesspeople and country analysts, including surveys of residents of countries. It is not the most accurate tool to measure corruption in any specific country but it is quite reliable. After the terrible earthquake on April 6, 2009, according to Interior Minister Roberto Maroni, Italy needs at least 12 billion euros to rebuild Abruzzo (News Source  © 2009 Reuters). However, with the quite high score in the 2008 CPI (4. 8 ), the government of Italy has to be cautious and consider carefully when pouring money into reconstructing Abruzzo unless they want to make another scandal Campania 1980, when some money was diverted to the Camorra, one of 3 biggest mafia organizations in Italy. When corruption exists, the money from transfer payment in circular flow of income will run out instead of injecting fully to households. The higher level of corruption is, the more money runs out that circular, causes the lesser supply of money in the whole economy and the government has to spend more money that would raise the public debt. If there is a corruption in the above project of Italy, the government will face the increase in public debt which exceeded Italy’s annual GDP already. And if the Italian Treasury were unable to find buyers for Italian sovereign bonds, Italy could default.