ECO 203 Final Paper

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Economics

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May 7, 2024

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1 Luxembourg Economic Measures and Policy Brandon Long University of Arizona Global Campus ECO 203: Principles of Macro-Economics Professor Salma Matin Due: 4 March 2024
2 Luxembourg’s economy has been a benchmark around the world for other countries to emulate within the European Union. Their economy is largely dependent on banking, steel, and various industrial sectors. Economies are comprised of many parts, such as Gross Domestic Product (GDP), debt, interest rates, and others, the Luxembourg economy is unique in that its citizens enjoy one of the highest per capita GDPs in the world. These factors will be explored and discussed in detail to provide a snapshot of the economy as well as explore some policy ideas on how to maintain or improve the economy in the short and long term. Economic Indicators The country has a modest GDP when compared to other countries like the United States, topping 77 billion Euros in 2022 or about 84 Billion Dollars today. With an overall population of 640 thousand people in 2022, the GDP per capita was slightly north of 120K Euros. This amount signifies the economic impact per person within the country and is staggering on its own because it is the highest in the entire world. Luxembourg’s average real GDP had a growth rate of 2.5% over the last decade. Highlighting the Luxembourg economy on the global stage, the country itself ranks 72 among other major economies with the United States taking the top spot by comparison. Public debt relates to the amounts owed by the different levels of government and is used to finance public deficits resulting from a higher level of program spending to budgeted income. This type of debt held by the public comes in many forms: Treasury bills, notes, bonds, and other various government securities. Public debt is an important aspect of an economy because it is a resource the government can tap into to help finance public spending and fill holes within the budget. Using public debt as a percentage of GDP can indicate the health of the government’s ability to meet future economic obligations. In 2022, the public debt for Luxembourg was 24.7%
3 of GDP. In the preceding decade, the public debt averaged 22.4% of the GDP, but it remained far below the area average of 90.9% of GDP. Luxembourg’s rate of inflation has seen its ups and down. Their Inflation was highest in 2022 at 8.2% for the year and saw a decrease in 2023 down to 2.9%. Increases in 2022 were largely due to the Russian invasion of Ukraine as well as increased energy and fuel costs as a direct result of larger economic tensions within the region as sanctions were enacted on Russia and they looked for other opportunities to secure their own fuel and oil reserves. This spike in demand created many challenges in terms of policy development and execution. Typically, an attempt is made to keep at around 2% annually, at least as a goal. Over the last decade, inflation has averaged 2.1% annually. Having such a surge highlighted the tenuous relationship between economic impacts from current events and inflation control overall. Inflation should continue on a downward trend for the country unless further disturbances happen. Policy interest are rates that are set by the government for purposes of controlling inflation rates as well as helping to stabilize the economy during times of economic turmoil from inside or outside sources. Policy rates in Luxembourg have averaged 1% per year historically, but June of 2022 saw an all-time low of 0%. Since that time, the policy rate has steadily increased. Current rates as current as January 2024 are 4.5%. With Luxembourg joining the Euro Area in January of 1999, they adopted the European Central Bank monetary policy mechanisms and have followed suit since that time. With much of their inflation being due to rising energy costs, different measures were put in place to combat unwanted economic impacts. These included placing a price cap on gas freezing electricity prices to their 2022 levels. Targeted allowances and tax credits were given to citizens to continue the forward movement of the economy.
4 Trade balance is the measure of the difference between a nation’s exports and imports of goods, services, and other income flow, and is factored into bilateral trading relationships. Luxembourg has historically operated at a trade surplus since 2016 with a peak in that year of 1.9 billion Euros. In 2017, the trade balance decreased to 1.7B Euro and a swift and steep decline from 2020 to 2022, with the most recent data indicating that their surplus was only at 100M Euro. While a decline in trade balance can be seen as a bad thing, it could simply mean that they are taking in far more goods than they are selling to other countries overall. Given the timeframe where the most precipitous decline was, it is highly likely that this is due to impacts from the global pandemic. State of the Economy While Luxembourg appears to have quickly recovered from the pandemic in 2019 and the years that followed due to extensive policy support, the Russian invasion of Ukraine has caused many inflationary pressures over that time. Overall Luxembourg has seen a slight economic decline recently as people are leaving the workforce as they age out and a skills gap is being created, not unlike in the United States currently. Stimulating the economy through decisive economic policy and government involvement would be beneficial to the citizens as well as the country. While the economic downturn is not enough to categorize a recession, likely, that inaction will only make the current downturn worse and compound the issues seen. Supply and Demand models and Philip’s curve The AD-AS model and Phillip’s curve are two economic displays that explore and communicate the relationship between GDP, inflation, and unemployment (Amacher et al, 2019). The AD-AS captures and models aggregate demand and supply model showing the
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