Diversification In Production And Consumption Economics Essay

Following Jovanovic and Gilbert ( 1993 ) and Chandra, Boccardo and Osorio ( 2007 ) , the Herfindahl Index ( HI ) will be used as the step of production and ingestion variegation. The HI lies between 1/N and 1, with 1/N bespeaking full variegation ( with N being the entire figure of export/import classs, 1/N indicates that each industry has the same export/import value ) and 1 bespeaking full specialisation ( as all exports/imports are from the same industry ) :

where is the portion of entire exports ( for mensurating production variegation ) or imports ( when mensurating ingestion variegation ) attributed to the industry.

3.7 Similarity of rising prices rates

This standard will be evaluated by comparing the rising prices rates of tradables of the different EMU members over the old ages by the same means as labour market integrating and factor market integrating: a correlativity matrix and rule constituent analysis.

3.8 Fiscal integrating

This standard will be evaluated, following Csajb & A ; oacute ; K and Csermely ( 2002 ) , by comparing the fringy sensitivenesss of the budget balances ( both primary and factual ) of the different states as a proportion of their GDP:

( 6 )

( 7 )

where GB indicates the factual authorities budget and PGB indicates primary authorities budget.

Following to the factual authorities budget, the primary authorities budget is used as a hardiness cheque. As the primary authorities budget measures the factual authorities budget non including the involvement payments over the authorities debt, the usage of the primary authorities budget allows an probe of the financial behaviour of states that is non influenced by the size of the authorities debt.

A in fiscal matters incorporate country consists of states holding similar values of MS. To prove whether this is the instance, a similar attack will be used as in subdivision 3.7.

3.9 Political integrating

This standard will non be tested in a formal mode. To measure whether the EMU complies with this standard, the construct of political brotherhood will be introduced and the original and current state of affairss in the EMU will be highlighted.

4. Datas

This paper focuses on the original state of affairs in the EMU and how this developed over the old ages. The states under probe are: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, United Kingdom, Denmark and Sweden. The first 11 states represent the original EMU member provinces that have been in the EMU since 1999, and the last three states represent the control group with which the empirical consequences of the original EMU states will be compared. The probe will be done in a time-varying mode over the period 1990-2011 by utilizing the construct of traveling norms, both in its simple signifier and in its cumulative signifier. A simple moving norm shows the norm of a certain variable over clip. It is calculated by taking the norm of a fixed figure of old ages, in this paper 5 old ages, and ‘rolling ‘ it over clip. That is ; the first information point will be determined by the norm over the old ages 1990-1994, the 2nd by the norm over the old ages 1991-1995 etc. and the last information point will be determined by the norm over the old ages 2007-2011. A cumulative moving norm on the other manus, does non utilize a fixed clip frame. The cumulative moving norm is calculated by spread outing the clip frame with every twelvemonth. That is ; the first information point will be determined by the norm over the old ages 1990-1994, the 2nd by the norm over the old ages 1990-1995, etc. and the last information point will be determined by the norm over the whole dataset ( 1990-2011 ) . This time-varying mode is chosen as it highlights the longer term tendencies in the information. The ground for utilizing both averaging constructs side by side, is the affair of hardiness. The twelvemonth 1990 is chosen as the get downing twelvemonth as this was the twelvemonth in which the first bill of exchange of the ECB Statute was prepared. Furthermore, in this twelvemonth the ‘One Market, One Money ‘ study was completed, the first phase of EMU started and an intergovernmental conference was launched to fix for phases two and three of the EMU. Summarizing, this twelvemonth was the official start of the European pecuniary and economic integrating.

The fact that the probe will be done utilizing informations over different states over different old ages indicates a panel information set. The debut of panel informations in this research allows the usage of both cross-sectional and clip series information to prove the workings of the EMU. In peculiar, it leads to a big figure of observations, which increases the grades of freedom and reduces the collinearity among the explanatory variables. The debut of panel informations therefore improves the efficiency of the trials that will be done.

In table I a sum-up is presented of the different datasets used and the beginnings of these datasets.

4.1 Price and pay flexibleness

To mensurate monetary value flexibleness, both the per centum alteration in existent demand and the per centum alteration in nominal monetary value degree are needed. To mensurate the demand degree, the undermentioned expression is used:

( 8 )

where Y stands for entire demand, C stands for entire consumer disbursement, I stands for entire capital investing, G stands for entire authorities disbursement, X stands for exports, M stands for imports and I and t represent state and twelvemonth severally. Entire consumer and authorities disbursement is measured by ‘Final ingestion outgo ( changeless LCU ) ‘ , entire capital investing is measured by gross capital formation ( in changeless local currency units ) , exports and imports are measured by ‘Exports of goods and services ( changeless LCU ) ‘and ‘Imports of goods and services ( changeless LCU ) ‘ . All datasets are from the World Bank ( 2012 ) and are available for all 14 states under probe and cover the old ages 1960-2011.

The per centum alteration in the demand degree of a certain state is calculated as:

( 9 )

The per centum alteration in the nominal monetary value degree is measured by ‘Inflation, GDP deflator ( one-year % ) ‘ from the World Bank ( 2012 ) . The World Bank defines this dataset every bit ‘Inflation as measured by the one-year growing rate of the GDP implicit deflator shows the rate of monetary value alteration in the economic system as a whole. The GDP inexplicit deflator is the ratio of GDP in current local currency to GDP in changeless local currency ‘ ( World Bank, 2012 ) . This dataset is available for all 14 states and covers the old ages 1961-2011.

To step pay flexibleness, both the per centum alteration in rewards and the per centum alteration in the unemployment are necessary. For the rewards, the ‘Gross rewards and wages ( current euros ) ‘ dataset is acquired from Eurostat ( European Commission, 2012 ) . Harmonizing to Eurostat, ‘Gross rewards and wages, merely as compensation of employees, include both wage in hard currency and in sort, but unlike the latter, they do non include employers? societal parts ‘ . This dataset is available for all 14 states, covers the old ages 1990-2011 and is measured in 1000000s of Euros from 1-1-1999/millions of European Currency Unit ( ECU ) up to 31-12-1998.

The unemployment rates are retrieved by uniting the ‘Unemployment, entire ( % of entire labour force ) ‘ dataset with the entire labour force dataset, both sets are from the World Bank ( 2012 ) and are available for all 14 states. The ‘Unemployment, entire ( % of entire labour force ) ‘ dataset covers the old ages 1980-2010 and the entire labour force dataset covers the old ages 1990-2010.

The per centum alteration in the pay of a certain state is calculated as:

( 10 )

And the per centum alteration in the unemployment degree of a certain state is calculated as:

( 11 )

4.2 Labor market integrating

For this standard, informations on nominal hourly labour costs and unit labour costs are needed.

The OECD provides an one-year dataset of the degree of labour compensation per hr, which will be used as a placeholder for the nominal hourly labour costs ( OECD, 2012 ) . Harmonizing to the OECD it is an first-class placeholder for the nominal hourly labour costs, with the difference that ‘the costs of enlisting, employee preparation, and works installations and services, such as cafeterias, medical clinics and public assistance services, are non included ‘ ( OECD, 2012a ) . This dataset is available for 10 states, covers the old ages 1990-2011 and is measured in Euros from 1999 onward. Data prior to 1999 is measured by change overing the national currencies into Euros utilizing the fixed exchange rate between the national currency and the Euro at its acceptance. The fact that this dataset is non available for all 14 states might be a job ; the states that are excluded from this dataset are Belgium, Luxembourg, Portugal and the United Kingdom. However, informations for the largest portion of the states is available and moreover the unit labour costs dataset, which is more dependable ( for an account of this statement see subdivision 3.2 ) , is available for all 14 states. This dataset is besides provided by the OECD ( OECD, 2012 ) and provides complete one-year information for the old ages 1990-2011. This information is besides measured in Euros from 1999 onwards and informations prior to 1999 is converted by utilizing the fixed exchange rate between the national currency and the Euro at its acceptance.

4.3 Factor market integrating

To mensurate capital market integrating, datasets on both the one-year long-run involvement rates and the one-year FDI flows are needed. Both datasets are retrieved from the ( OECD, 2012 ) . The datasets are available for all 14 states, provide one-year informations for the complete period 1990-2011 and are measured in Euros from 1999 onwards, whereas data prior to 1999 is converted by utilizing the fixed exchange rate between the national currency and the Euro at its acceptance.

4.4 Fiscal market integrating

To mensurate this standard, informations on the gross stock of foreign assets and liabilities of each state are needed together with the GDP degrees and the Chinn-Ito index of each state.

The gross stocks of foreign assets and liabilities are derived from the ‘International investing place – one-year informations ‘ dataset from Eurostat ( European Commission, 2012 ) . As the international investing place ( IIP ) is calculated by deducting the gross stock of foreign liabilities from the gross stock of foreign assets, this dataset provides informations on the gross stock of foreign assets and liabilities of each state. For the one-year GDP degrees, Eurostat provides a dataset named ‘Gross domestic merchandise at market monetary values ‘ ( European Commission, 2012 ) . Both datasets are available for 13 states ( with the exclusion of France ) , cover the old ages 1990-2011 ( with some exclusions ) and are in 1000000s of Euros from 1-1-1999/millions of ECU up to 31-12-1998.

The Chinn-Ito index dataset is retrieved from Chinn and Ito ( 2008 ) . This dataset is besides available for 13 states, as in this dataset the comparatively little state Luxembourg is excluded, and covers the old ages 1970-2010.

4.5 The grade of economic openness

To see whether the EMU states comply with this standard, each state ‘s export and import values are needed, together with the degree of GDP. All three datasets can be found at the World Bank web site ( World Bank, 2012 ) and all three datasets are in current Local Currency Units. A ‘current ‘ dataset shows the informations for each twelvemonth in the value of the currency for that peculiar twelvemonth, this to mensurate the nominal value of a variable. The datasets are in Local Currency Units as the expression is calculated for each state individually ( and non with values of different states ) . Furthermore, since the expression is a break, the comparative proportions affair and non the absolute degrees.

For export values, a dataset named ‘Exports of goods and services ( current LCU ) ‘ is used. The World Bank defines exports of goods and services as stand foring ‘the value of all goods and other market services provided to the remainder of the universe. They include the value of ware, cargo, insurance, conveyance, travel, royalties, licence fees, and other services, such as communicating, building, fiscal, information, concern, personal, and authorities services. They exclude compensation of employees and investing income ( once called factor services ) and reassign payments ‘ ( World Bank, 2012 ) . This dataset is available for all 14 states and covers the old ages 1960-2011.

The import values are measured by the dataset ‘Imports of goods and services ( current LCU ) ‘ . Similar to the export dataset, this set is defined by the World Bank ( 2012 ) as: ‘the value of all goods and other market services received from the remainder of the universe. They include the value of ware, cargo, insurance, conveyance, travel, royalties, licence fees, and other services, such as communicating, building, fiscal, information, concern, personal, and authorities services. They exclude compensation of employees and investing income ( once called factor services ) and reassign payments ‘ . This dataset is available for all 14 states and covers the old ages 1960-2011.

Last, the GDP ( current LCU ) dataset is measured as ‘the amount of gross value added by all resident manufacturers in the economic system plus any merchandise revenue enhancements and minus any subsidies non included in the value of the merchandises. It is calculated without doing tax write-offs for depreciation of fancied assets or for depletion and debasement of natural resources ‘ . This dataset is available for all 14 states and covers the old ages 1960-2011.

4.6 The variegation in production and ingestion

For this standard, informations is needed refering the one-year import and export values of states subdivided into industries.

Both the imports-per-industry informations every bit good as the exports-per-industry informations are retrieved from Eurostat ( European Commission, 2012 ) . Both series are retrieved from the dataset ‘International trade of EU, the euro country and the Member States by SITC merchandise group ‘ . This dataset provides entire exports and imports, subdivided into seven industries ( Food, drinks and baccy ; Raw stuffs ; Mineral fuels, lubricators and related stuffs ; Chemicals and related merchandises, n.e.s. ; Other manufactured goods ; Machinery and transport equipment ; Commodities and minutess non classified elsewhere in the SITC ) . The dataset is available for all 14 states, covers the old ages 1990-2011 and is in 1000000s of Euros from 1-1-1999/millions of ECU up to 31-12-1998.

4.7 Similarity of rising prices rates

The rising prices rates used to measure this standard are the same as the 1s used to measure standard 1: ‘Inflation, GDP deflator ( one-year % ) ‘ from the World Bank ( 2012 ) . The ground for utilizing this deflator as rising prices step alternatively of utilizing one based on consumer monetary values is that this deflator measures the rising prices rates of tradables, whereas rising prices steps based on consumer monetary values besides measures services and other non-tradable merchandises. The World Bank defines the GDP deflator dataset as ‘Inflation as measured by the one-year growing rate of the GDP implicit deflator shows the rate of monetary value alteration in the economic system as a whole. The GDP inexplicit deflator is the ratio of GDP in current local currency to GDP in changeless local currency ‘ ( World Bank, 2012 ) . This dataset is available for all 14 states and covers the old ages 1961-2011.

4.8 Fiscal integrating

To mensurate the grade of financial integrating, datasets on the primary authorities budget, the factual authorities budget and on GDP degrees are needed.

For the primary and factual authorities budgets, the ‘Government gross, outgo and chief sums ‘ dataset is retrieved from Eurostat ( European Commission, 2012 ) . With this dataset, the primary authorities budget can be calculated as:

( 12 )

whereas the factual authorities budget can be calculated as:

( 13 )

The dataset provides informations for all 14 states under probe over the old ages 1990-2011 and is measured in 1000000s of Euros from 1-1-1999/millions of ECU up to 31-12-1998.

The GDP information is besides retrieved from Eurostat ( European Commission, 2012 ) as ‘Gross domestic merchandise at current market monetary values ‘ . This GDP dataset is chosen as it is, similar to the authorities gross and outgo dataset, measured at current market monetary values.

The per centum alteration in the primary authorities budget ( PGB ) of a certain state is calculated as:

( 14 )

And the per centum alteration in the GDP degree of a certain state is calculated as:

( 15 )

5. Consequences

In this subdivision each standard will be carefully tested and the results of these trials will be evaluated. Furthermore, it will be indicated whether the European Monetary Union fulfills each of the nine standards.

5.1 Price and pay flexibleness

Price flexibleness is measured by the snap of monetary values with regard to demand. In tabular arraies II and III the simple and cumulative moving norms of these snaps can be seen severally. As indicates flexibleness, it becomes clear that this standard is non satisfied today nor was it satisfied in 1999 as there are more snaps below the value of 1 than there are above. Furthermore, both Germany and Sweden have merely simple traveling mean snaps of below 1, while the cumulative moving norm elasticities show series below the value of 1 for Belgium, Finland, France, Germany and Sweden.

Wage flexibleness is evaluated by looking at the snaps of rewards with regard to unemployment. Tables IV and V show the simple and cumulative moving norms of these snaps severally. It can be seen that in these tabular arraies that there are more values above 1 than there are below, bespeaking pay flexibleness. Furthermore, in both tabular arraies no state can be found with an snap series of below 1. In add-on, these tabular arraies show an betterment in pay flexibleness over the old ages.

5.2 Labor market integrating

The consequences of this standard are shown by tabular arraies VI-IX and figures I-II. Tables VI-IX study the per centum of the overall discrepancy of the hourly and unit labour costs that can be explained by the first rule constituent, whereas figures I-II show these values in a graph. Tables VI and VII show the simple and cumulative moving mean consequences of the rule component analysis of the hourly labour costs severally, whereas tabular arraies VIII and IX show the simple and cumulative moving mean consequences of the PCA of the unit labour costs. It can be seen that the rule constituent analysis is executed non merely for the whole group of states under probe, but besides for the EMU ‘core ‘ ( Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain ) and the control group ( United Kingdom, Denmark and Sweden ) individually, so as to place any divergency between these two groups of states.

The hourly labour costs tabular arraies ( VI and VII ) show lower values for the last period of the tabular array than for the first period, bespeaking that hourly labour costs convergence has declined. However both tabular arraies show values of above 90 for about all periods, which indicates that the hourly labour costs convergence has ever been, and remained, reasonably high and the diminution in convergence can therefore be considered negligibly little. When placing the consequence of the official start of the EMU ( 1999 ) , it can be seen that including the twelvemonth 1999 in the cumulative mean consequences in an increasing tendency in convergence for the EMU ‘core ‘ states and a diminishing tendency in convergence for the states in the control group.

The unit labour costs tabular arraies ( VIII and IX ) show overall lower values, with no important form bespeaking the consequence of the EMU debut. However, the PCA values are still moderately high and convergence can therefore be recognized. Furthermore, most of the values of the last period are merely marginally higher or lower compared to the values of the first period, bespeaking that the unit labour costs convergence has ever been, and remained, reasonably high.