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The Economic Crisis In Ireland Economics Essay

The economic crisis in Ireland gave rise to, and ultimately became over dependant on, the property sector. The initial investment in property was based on solid demand and supply fundamentals, such as rising population, strong income growth and low unemployment. However, after the successful recovery of the Irish economy in 2002, individuals underestimated the risk involved in entering the property market. However, the real estate boom that swept the United States also swept the world, including Ireland. The nation had survived a housing bubble in the late 1990s, but the banking sector, emboldened by the global boom, doubled its assets in just three years, lending to Irish and non-Irish alike. When the global bubble burst, the banks were in a severe crisis. The government feared that institutional providers of funds to the banks would withdraw, leading to a collapse of the banking sector. To prevent such a run, the government guaranteed the senior debt of the banks.
From 2004, the property market displayed the signs of an asset price bubble. Many international commentators highlighted the dangers of Ireland’s over reliance on the construction and property sectors. The IMF (2006) observed that growth in Ireland had become increasingly unbalanced since 2002, with a “heavy reliance on building investment, sharp increases in house prices, and rapid credit growth, especially to property-related sectors”. Economist’s (2004) survey of Ireland indicated that the Irish banking system was heavily exposed to the property sector and a crash would “badly hit the balance sheets of the two big Irish banks, Allied Irish Bank (AIB) and Bank of Ireland”. However, these warning went unheeded by policy makers, the regulator and banking institutions and Ireland’s monetary and public policy initiatives reflected this ignorance.
The correction in the housing market commenced in early 2007, as interest rates started to increase and the economy became affected by the shock of the sub-prime crisis. In 2008, property prices declined nationally by 9.1 per cent, compared with a fall of 7.3 per cent, the previous year (Permanent TSB/ESRI, 2009). According to Friends First (2008), house prices have dropped by 25 per cent since the height of the housing booming 2006 and are set to drop within a range of between 20 and 30 per cent over the course of the next three years. Recent indications are that the reductions are closer to 40-50 per cent. Construction output has contracted each month since June 2007, resulting in 40 per cent reduction in house unit completions in 2008 (Department of the Environment, Heritage and Local Government, 2009). The impact of the adjustment in the housing market has spread to other sectors of the economy including non-housing investment and consumption. The commercial building sector further contracted in 2010 with substantial declines in both output and capital values also expected. Following the falloff in property prices, customers are now facing the possibility of negative equity and banks are left with loan books which are heavily exposed to the declining property market. The failure of IFSRA to limit these consequences is a product of its laissez-faire approach to supervision. The Irish Central Bank (2008) had clearly identified strong credit growth and rising indebtedness as major systemic vulnerabilities. This is especially true in relation to the latter stages of the property cycle where the loan books of Irish banks increased from e166 billion in 2004 to 275 billion by 2007. The majority of the expansion in credit was funded through “disproportionately high” borrowing from the ECB (Morgan, 2008; Goodbody, 2008), as “banks leveraged their deposits with sizeable borrowings from abroad” (Honohan, 2010).
The rapid deterioration in the Irish economy is reflected in the financial results of the main Irish banks. In May 2009, recently nationalised Anglo Irish Bank, posted a loss of over 4.1 billion, the largest in Irish corporate history, and expects loss to be 7.5 million by the end of the year. In 2008, AIB reported pre-tax profits of e1 billion, a 60 per cent reduction from the previous year. It announced a 4.3 billion bad debt charge in 2009, due to an increase this year in its loans in difficulty by 9 billion to 24.3 billion. The Bank of Ireland, in the year ended 31 March 2009, recorded a loss before tax of 7 million vs a 1.93 billion profit in 2008. It has raised its expected bad debt charge for the three years to March 2011 to 6 billion. In relation to foreign players, Bank of Scotland (Ireland) has reported a “significant increase in impairments” because of falling asset values in 2008 and described the severe deterioration in the property market as “unprecedented”. As of February 2010, in light of difficult market conditions, the bank closed its retail arm, Halifax, with the loss of over 750 jobs. Therefore, it is clear that the Irish banking sector will have to deal with the consequences of the imprudent and high risk lending practices that fuelled the property bubble and resulted in short-term super profits. Its capital base has been destroyed and years of steady progress and integrity have been eroded in a few short months.
The disaster was mainly caused by the inadequate risk management practices of the Irish financial institutions and the failure of the regulator to supervise these practices effectively. The situation was occurred by the pro-cyclical monetary and public policy initiatives enacted by the Irish Government at that time and amplified by the international financial sub-prime crisis in 2008. The decline in the Irish property market has been the prime reason why the capital structures of the Irish banks have been significantly eroded with the prevailing global credit crisis compounding liquidity concerns. The Irish banking sector has effectively lost the confidence of international markets and the public in general.

The Gross Domestic Product Of Australia Economics Essay

Economic growth is the increase in value of the goods and services produced by an economy. It is conventionally measured as the percent rate of increase in real gross domestic product, or GDP. Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. In economics, “economic growth” or “economic growth theory” typically refers to growth of potential output, i.e., production at “full employment,” which is caused by growth in aggregate demand or observed output. As economic growth is measured as the annual percent change of National Income it has all the advantages and drawbacks of that level variable. But people tend to attach a particular value to the annual percentage change, perhaps since it tells them what happens to their pay check.
The real GDP per capita of an economy is often used as an indicator of the average standard of living of individuals in that country, and economic growth is therefore often seen as indicating an increase in the average standard of living. However, there are some problems in using growth in GDP per capita to measure general well being.GDP per capita does not provide any information relevant to the distribution of income in a country. GDP per capita does not take into account negative externalities from pollution consequent to economic growth. Thus, the amount of growth may be overstated once we take pollution into account. GDP per capita does not take into account positive externalities that may result from services such as education and health. GDP per capita excludes the value of all the activities that take place outside of the market place (such as cost-free leisure activities like hiking).
Economists are well aware of these deficiencies in GDP, thus, it should always be viewed merely as an indicator and not an absolute scale. Economists have developed mathematical tools to measure inequality, such as the Gini Coefficient. There are also alternate ways of measurement that consider the negative externalities that may result from pollution and resource depletion (see Green Gross Domestic Product.)The flaws of GDP may be important when studying public policy, however, for the purposes of economic growth in the long run it tends to be a very good indicator. There is no other indicator in economics which is as universal or as widely accepted as the GDP. Economic growth is exponential, where the exponent is determined by the PPP annual GDP growth rate. Thus, the differences in the annual growth from country A to country B will multiply up over the years. For example, a growth rate of 5% seems similar to 3%, but over two decades, the first economy would have grown by 165%, the second only by 80% (source: wikipedia).
1.2 Gross Domestic Product (GDP) – Australia The market value of all final goods and services produced in Australia during a specific period. The growth rate of GDP is used as a broad gauge of the overall economic health. Robust GDP growth signals a heightened level of activity that is generally associated with a healthy economy. However, economic expansion also raises concerns about inflationary pressures, and strong GDP growth may induces the Australian central bank to raise interest rates in order to combat inflation. As a result, positive GDP readings are typically bullish for the Australian dollar, while slumping GDP growth is usually bearish.
1.3 Formula calculation of GDP The calculation of GDP according to the following formula:
GDP = C I G (EX – IM) C = private consumption
I = private investment
G = government expenditure
EX = exports of goods and services
IM = imports of goods and services
1.4 Economic of Australia Australia has one of the strongest economies in the world, with almost two consecutive decades of growth and the unemployment rate falling to generational lows. As a result of nearly three decades of structural and policy reforms the economy is flexible, resilient and increasingly integrated with global markets. Since 1991, Australia’s real economy has grown by an average of 3.3 per cent a year. Australia’s gross domestic product (GDP) in 2007 (in value terms) was around $1 trillion. Unemployment has also fallen, from a peak of almost 11 per cent 15 years ago to below 5 per cent in 2008, the lowest level since the 1970s. In its 2007 Economic Survey of Australia, the Organization for Economic Co-operation and Development (OECD) described Australia’s macroeconomic performance as impressive, with GDP growth since 2000 averaging above 3 per cent a year and growth in real gross domestic income averaging more than 4 per cent (including the terms of trade gains). Australia’s exports of goods and services rose 16 per cent to reach their highest value on record of $215.8 billion in 2006-07, about 21 per cent of Australia’s GDP. Australia’s businesses are competitive across a wide range of sectors. Australia has long been a major exporter of agricultural, minerals and energy commodities. More recently Australia has diversified into new services and sophisticated manufacturing export markets.
Australia economic has achieved average 2.9% GDP growth from 2000 to 2007. The main contributing factor to the GDP of Australia was private consumption expenditure. The total private consumption expenditure shows a rise from AUS$400,603million in 1997 to RM566, 221 million in 2007. These indicate the difference of nearly AUS$166,000million after ten years. Government consumption expenditure was the second contribution to the Australia GDP over the past ten years which rise AUS$46380. Private investment was the third economic engine which shows a minor growth to the GDP of Australia.
Overall Economy Performance analysis of Australia 1998 – 2007 The 1998 budget could not have been better timed. Had the deficit not been eliminated this year and the economy put on a more secure foundation, the instability in Asia would have taken an enormous toll on the Australian economy. This year’s budget has left the Australian economy stronger and more resilient in the face of the certain difficulties which will arise because of the crisis in Asia. There will be effects in Australia. But what the budget has done is ensure that whatever damage there is will be kept to a minimum. The return of the Australian economy to surplus has been crucial in maintaining confidence in spite of the difficulties now being faced.
In 1999, a surplus created out of tax increases merely allows public sector activity to continue at the expense of the private sector. The results is a less productive economy, and over time, a slower rate of growth in living standards than would have otherwise occurred. Australia’s growth rate in 1998-99 would have been well above four per cent and the unemployment rate would have fallen to around seven per cent or even less. The Government chose from the start the path of fiscal consolidation which has resulted in greater business confidence, lower rates of interest and a more productive economic structure.
Since 2000 to 2001, the Australian economy is now in the midst of a slowdown in activity. The slowdown has been largely due to decisions of the Reserve Bank of Australia to raise rates five times since November 1999 which has led to the slowing in the economy the rate increases were designed to effect. Yet it was not interest rates alone which have caused the economy to falter. Of particular importance has been the rising cost of crude oil which has put a damper on activity around the world. The higher cost of transportation has taken a toll on activity not just in Australia but overseas as well. Amongst the most important actions the Government can take is to ensure that not only is the budget surplus maintained, but there is only limited growth in the rate of public spending. Reductions to business taxes that improved the level of business retained earnings would be the most effective means to create a rapid improvement in the level of economic activity.
In the year of 2001, industrial relations reform will become increasingly important during 2001 and should, accordingly, be given a high priority during budget preparation. There are a number of immediate issues which will require attention if Australia is to achieve an adequate labour relations system, characterised by decentralisation and voluntarism. Innovation should be encouraged. It is the responsibility of the government to promote innovation through increased business investment in R