Deating the Celtic Tiger 20 15 10 - 010 annual change in consumer prices 0/0 annual growth in gross domestic product 0/0 unemployment rate 10 Source: Central Statistics Office. Ireland. www.cso.ie . The chart above displays economic indicators for Ireland between 1990 and 2011. The Irish economy was one of fastest growing economies in Europe during the 19905 and became known as the Celtic Tiger. However. boom turned to bust following the global nancial crash and recession in 2008. As a result. both private sector and public sector debt increased sharply and the government had to seek financial assistance worth $113 billion from the European Union and International Monetary Fund [IMF] to help it reduce its debt and to support the fragile banking system in the country. The Irish banks had loaned heavily against land and prOperty developments that had since fallen significantly 1 in value due to the slump in demand. Many of their loans were in default as rising unemployment had meant many people could not continue their loan repayments. 1 Explain what each of the indicators in the chart measures 2 What trends can be identified in inflation, unemployment and output from the chart? 3 What evidence is there that there was deflation in the Irish economy towards the end of the period shown in the chart? 4 What evidence is there from the chart that deflation, unemployment and falling economic activity are closely related? Explain why. 1. The percentage of unemployment rate (blue line) measures the change in the total number of unemployed people relative to the total labor force over a period of one year. The concept of the economy shows how many people who want to work but can't find a job are left unemployed. The numbers in the statistics only include those who are of age and actively looking for a job. If a person has not looked for a job within four weeks, they are out of the labor force. The percent annual change in consumer prices (red line) , or CPI, measures the changes in the prices of a basket of goods for a normal consumer, consumed over one year. This is measured using the consumer price index. The GDP (yellow line) represents the changes in gross domestic product, or GDP. The percentage annual growth in GDP measures the change in the total output of the Irish economy over a period of one year. Each trend line helps us compare fluctuations with one another. 2. The red line (CPI) indicates the level of inflation that's expected to happen in the future. It can be seen from 2 to 6 percent until 2008. After that, it is negative and under 0%, which means that the economy is in deflation. The GDP level during the 1990s was growing fast, but it started declining in 2008 after it had reached a high of 5%. The output was negative after 2008. The trend for CPI is a downward trend it is because based on the graph the annual gross of the products and it is going downward. The unemployment rate increased substantially during the 1990s. It went from 15% to 5% during the 2000s before it reached its peak during the financial crisis. The trend for employment is up because the line between inflation and economic growth is going up. A rising unemployment rate is caused by declining inflation. On the other hand, moderate inflation can lead to a lower rate of unemployment as the economy grows. 3. Deflation is a type of economic phenomenon that occurs when the consumer price level of goods and services goes below zero. This can be seen from the red line, which shows the reduction in inflation from 4% to 5%, but then dips below zero later on. Deflation is determined by changes in the consumer price index (CPI). CPI measures the cost of goods and services that a typical consumer will by and to help track the cost of living, the CPI benchmarks how cost changes over time. The red CPI line is moving down, meaning that the CPI is decreasing, insinuating that deflation is taking place. This could be associated with decreases in demand for goods and services, supply and demand changes, or policy. If there is an increase in supply, products could cost less. If circulating money is reduced by the central bank, prices will fall. It seems that consumers stopped spending money, which could be a result of unemployment (no one is working) or general fear of what will happen next. When people get scared, they stop spending money and taking out loans (bad for banks). Deflation and unemployment are directly related. It's believed that the lack of jobs and the fear of the future caused consumers to stop spending money. They also stopped taking out loans. There was negative economic growth rate, rising unemployment, and negative inflation rates. All correlated and connected to one another. When the CPI goes up, an average consumer must spend moremoney in order to maintain their current standard of living. A deation is a type of economic phenomenon that occurs when the prices of various commodities fall. It can cause companies to reduce their production and lay off workers, which can affect the growth of the economy. This type of decline in the prices of commodities can also cause the money supply to contract. It is a vicious cycle. 4. During the crisis, the unemployment rate increased from 5% to 10%. There was reduction in the country's output level and a decline in GDP. When prices fall, businesses reduce their production and lay off workers. This could be caused by the decline in demand, which could be caused by the lack of money to spend. It's hard to tell which cause this cycle is, as it seems like it can be either the fall in demand or the lack of money. From 2000 to 2008, the consumer price index has closely followed the GDP. The rise in the consumer price index from 2000 to 2008 closely followed the growth in the GDP. From 1992 to 1995, the increase in GDP also corresponded with the reduction in unemployment.From 2000 to 2007, the unemployment rate was relatively stable at around 5%, while the consumer price index increased by around 2%. However, during the crisis in 2008, the unemployment rate spiked. The decline in economic activity caused the GDP to go down, and the prices of goods and services to fall. People refrain from spending, which leads to less production and jobs. The government tried to stimulate the economy by providing monetary stimulus, but the dollar has lost value. The trend lines for the growth and ination of the economy are different from the trend lines for the unemployment rate. During times of economic crisis, like the one in 2008, the unemployment rate and the declining growth rates was associated with high unemployment