Italy’s Economic Analysis

Economic performance

Italy’s economy has experienced dramatic changes from an economy based on agriculture into an industrial economy. It has been ranked the 6th biggest economy in the world and is a member of the G8, the most industrialized country in the world. Italy is ranked third among EU member states. It has experienced increasing growth over the years since the Second World War but since 2000, it has experienced a decline in its economic growth depicted in its gross domestic product which is a total of the recorded value of a countries production of goods and services. It has been hit by four recessions since then with consumption declining consequently.

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The economy mainly is driven by the manufacture of consumer goods that are of very high quality. The service sector is the biggest contributor to the country’s GDP and is consequently the biggest source of employment to the Italian population. It is followed by the industrial sector with the agricultural sector contributing the least.

GDP

The county’s GDP purchasing power parity currently stands at 1.8 trillion dollars in 2008 (www.cia.gov). This is compared to 1.3 trillion dollars in 2000, a 0.5 increase, and an official GDP exchange rate of 2.4 trillion dollars in 2008. The country’s GDP per capita, which is got by dividing the GDP by the population of a country, is at 31,000 dollars in 2008 an increase from 22,100 in 2000.

The country’s composition of its GDP is mainly in the service sector totaling 71.3%, followed by the industry and commerce sector with 26.7% and agriculture with a dismal 2%. Its gross investment amounts to 20.5% of GDP in 2008. It has a labor force totaling 25.1 million of a total population of 60 million people compared to 23.4 million in 2000. It has a budgetary income of 1.14 trillion dollars and a budgetary expenditure of 1.2 trillion in 2008 while in 2000 budgetary income was 488 billion dollars and a budgetary expenditure of 501 billion dollars ending up with a budgetary deficit that has been witnessed over this period.

Its public debt stands at 103.7% of its GDP while the inflation rate that depicts consumer price changes of a common basket of goods, is at 3.6% in 2008 while in 2000 inflation rate stood at 2.5 %. Exports amount to 566.1 billion dollars in 2008 compared to 241.1 billion dollars in 2000 depicting an increase in gross exports. Imports in 2000 were 231.4 billion dollars compared to 566.8 billion dollars indicating a gross increase in imports. Its current account balance in 2008 was at a negative 68.82 billion dollars.

Major trading partners and products

Italy’s major trading partner is the European Union taking up over 50% of total trade. Members of the EU that it carries out most of its trade with are Germany 12.9%, France 11.4%, Spain 7.4%, the United Kingdom 5.8%, and the Netherlands 7.1% (www.motherearthtravel.com). The other major trade partners include Spain and the USA. Its major imports are energy, chemicals, minerals, transport, and engineering goods, minerals, foodstuffs, textiles and metals. It exports motor vehicles, precision machinery, electric goods, clothing, transport equipment, and engineering products, beverages, tobacco, chemicals, pharmaceuticals, minerals, energy products and non-ferrous metals.

Unemployment

Unemployment in Italy has been decreasing over the years from 10.1% in 2000 to the current 7% which is below the EU set levels of unemployment. This decline in unemployment is a result of changes that have been made to labor laws in Italy that have addressed unemployment and especially that found in the southern region as suggested by Hancke et.al (169). It is more in the southern part of the country than it is in the north because of corruption, organized crime, and underdeveloped infrastructure. This has led to the holding back of investment and the creation of jobs in the southern part of Italy. Overall, women face higher unemployment rates compared to men. When looked at from the age dimension, unemployment is more rampant in the youth than it is in the older age groups.

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Labor force

Italy’s labor force was at 23.4 million people in 2000 and has increased to 25.1 million in 2008, a gradual increase over the years in tandem with overall growth in the population. This labor force is composed mainly of the male gender with over 60% of the labor force being men while women the rest according to data from the US state dept website (www.state.gov). Italy’s population structure has been changing over the years.

Increased life expectancy has resulted in an increasingly older society while the number of youths is decreasing. Low fertility rates have resulted in reducing population growth hence leading to a reduction in labor force growth. These factors have resulted in a labor force that is made up of the older members of society while the younger members make up a small percentage. Most of the labor force works in the service sector of the economy amounting to 65%, while 30% works in the industrial sector of the economy with the remaining 5% working in the agricultural sector of the economy.

Inflation rate

The rate of inflation in Italy has been increasing over the years with an increase in consumption levels, population and standards of living. The inflation rate in 2008 was at 3.6% compared to 2.5% in 2000, a 1.1% increase. Inflation in Italy has been increasing as a result of the increasing consumer prices of consumer goods contained in the common basket of consumer goods.

An increasing population has resulted in increased consumption levels that have led to a rising demand which in turn will lead to increased prices of consumer goods. The increasing standards of living have also contributed to the increasing rate of inflation as more people move up the social ladder entering a higher income bracket and subsequently increased consumption levels. This invariably leads to increased aggregate demand which will lead to prices of commodities being increased.

National budget

Italy’s budget has continually had a deficit with expenditure exceeding revenue according to the IMF (www.imf.org). Budgetary revenue in the year 2000 was 488 billion dollars while the budgetary expenditure stood at 501 billion dollars, a deficit amounting to 13 billion dollars. The budgetary revenue in 2008 was 1.14trillion dollars while the budgetary expenditure was 1.2 trillion dollars ending up with a deficit amounting to 0.06 trillion dollars.

Since 2000, the country has had a deficit every year as the revenues that the government collects are unable to meet the country’s needs. The major source of revenue in Italy is taxes that the state levies on the Italian population as noted by Grant (154). Principal taxes levied include a tax on income, tax on incomes from investments, tax on incomes from rental property, tax on capital gains, tax on the sale or transfer of property and municipal taxes. It covers this deficit through external borrowing of funds from organizations such as the World Bank.

Exogenous shocks

Significant exogenous shocks that have affected Italy in the past few years include a shortage in oil supply that is crucial in its economy as a major energy source used in its industry according to Calingaert (22). Oil supply shortage that was experienced worldwide also was felt in Italy as oil prices skyrocketed as oil-producing countries cut their oil production. This led to a decline in production and subsequent declining revenue.

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Another exogenous shock that has affected Italy is the recent credit crunch that was experienced worldwide. It resulted in reduced money to carry out transactions and purchase goods due to falling credit amounts. This caused problems within the financial sector with financial institutions lacking funds to offer credit facilities to the public. This resulted in the reduction of the amount of disposable income of households affecting gross expenditure levels which dipped downwards leading to decreasing aggregate demand.

Conclusion

In conclusion, Italy has the ability to grow slowly. With the continued policies and labor law changes, it can go on reducing the unemployment level further down. This will help in harnessing the available manpower in the country and utilize it in activities that are of economic value and importance to the country. It could also consider ways of capturing more women and the youth into the active labor force and substantially increase the country’s production capacity as the additional labor force gets involved in economically productive activities. Secondly, through borrowing to cover its budget deficits from financial institutions that offer convenient repayments terms and repayment schedules, it can cushion itself from exogenous shocks that could potentially affect its economy slowing down economic activities relative to other countries.

Works cited

CIA World Fact book. Italy. 2009. Web.

Grant, Amyot. Business, the state and economic policy: The case of Italy. Rutledge, 2004.

Hancke, Rhodes and Mark Thatcher. Beyond varieties of capitalism: conflict, contradiction and complementarities in the European economy. Oxford: Oxford university press, 2007.

International Monetary Fund 2008. World Economic Outlook Database. Web.

Italy. 2007. The Travel Blog. Web.

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Italy. 2008. US state Department. Web.

Italy’s economy sinks lower. 2007. The Entrepreneur. Web.

Italy’s economy. Mother Earth Travel, 2007. Web.

Italy’s tax system. 2008. The Expatriate Financial Guide to Italy. Web.

Michael Calingaert. “Who’s the Comeback Kid? France, Germany, and Italy are struggling to recover. Who’ll come out on top? The International Economy, 2003.

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