Impact of Inflation, Public Deficit, and the EU

Posted on Feb 1, 2025 in Economy

Impact of Inflation on Purchasing Power and Prices

  • If prices rise but wages do not, purchasing power is reduced.
  • The more inflation rises, the higher the price of money will be.
  • If a price rises in one country more than in a neighboring country, it will be harder for the country to sell products abroad because prices will be more expensive.

Consumer Price Index (CPI)

The Consumer Price Index measures the change in prices of consumer goods in a given period. It is used to measure the evolution of inflation. The formula is:

CPIt = (Cost of the basket in year t / Cost of basket in base year) x 100

Public Deficit

  • Public Expenditure: A set of resources that the State intends to use to fund public needs.
  • Public Revenues: A set of revenues used to finance state spending.
  • Public Deficit: If government spending exceeds government revenues, the state ends up in a deficit. To finance it, the state borrows from individuals and national and foreign institutions. The set of ways in which the State acknowledges its debt is called public debt (Treasury bills, bonds, obligations of the State).

International Economic Relations

These are the relations of one country with another to obtain goods and services that are not available, and those we sell as surplus.

Balance of Payments

The Balance of Payments is an accounting document that records the transactions that take place between residents of a country and the rest of the world for some time, approximately a year. It is like a follow-up of economic relations.

It consists of three accounts:

1. Current Account

  • Goods: Imports/Exports
  • Services: Tourism, transportation
  • Revenues: Income from investments, income of workers, etc.
  • Current Transfers: Remittances sent by migrants to their families, subsidies, etc.

2. Capital Account

  • Capital Transfers: Funds for the development of the EU
  • Acquisition and disposal of non-financial assets that are not produced, etc.

3. Financial Account

  • Direct Investment: Carried out with the intention of having a degree of influence over the company
  • Investment Portfolio: Buying and selling of securities
  • Other Investment: Loans to commercial operations
  • Change in Reserves: Variation in reserve assets

Balance and Imbalance of Payments

It informs about the competitive position of a country’s economy in relation to the outside world.

Currency Market

In the currency market, coins from different countries are bought and sold.

The European Union

The European integration process has culminated in the constitution of the European Union. The objective was to ensure peace on the continent and involved 6 countries: France, Germany, Italy, Belgium, the Netherlands, and Luxembourg. In June, a Treaty of Accession of Spain to the European Communities was signed.

Implications for Integration in Spain

  • Increasing competition
  • Large inflows of foreign investment
  • Adaptation to common policies
  • Access to European funds

The Euro

The Euro has been the official currency of the European Union since January 1, 1999. At that time, the exchange rate of the peseta/euro was irrevocably fixed (166.386 pesetas/euro). Among the advantages, it has resulted in the reduction of transaction costs, the disappearance of exchange risk, etc. Among the drawbacks is the danger of loss of competitiveness if prices grow at a higher level than in other countries, that is, if there is higher inflation.