Finland - Welfare State - Economic Indicators
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Transcript of Finland - Welfare State - Economic Indicators
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To what extent is Finland’s operation as a welfare state reflected in its macroeconomic indicators?
To what extent is Finland’s operation as a welfarestate reflected in its macroeconomic indicators?
Unit 2 Research Essay
By: Vincent Wang
Wordcount: 1,089
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To what extent is Finland’s operation as a welfare state reflected in its macroeconomic indicators?
Data
Finland is a highly developed nation, ranked 22nd in the world by the Human Development Index, a
multifactorial measure of quality of living by the UNDP.
GDP stands for Gross Domestic Product. It is ameasure of the income of a country. Since
income is equal to total expenditure ($x spent
by one party is $x earned by others), GDP is
given by the sum of consumer and government
expenditure, investment, and money flow from
international trade from the difference between
export and import revenue. GDP per capita is a
measure of income per person in an economy’s
population, a reflection of the earning power of
each individual. GDP and GDP growth are
macroeconomic indicators, and to maximisethem is a governmental aim. Finland’s nominal
GDP in 2010 was €181.8bn, while real, inflation
adjusted GDP was €177.7bn. GDP per capita
stood at €33,200 in the same time, compared to
€22,950 in Europe on average.
Government Expenditure, part of GDP, is how
the government invests its revenue in its people.
The revenue, gained mainly through taxation, is
spent on merit and public goods, such as
healthcare, education, and transportation. Meritgoods are underproduced private goods with
positive externalities. Public goods are non-
rivalrous and non-excludable goods that the free
market is unwilling to produce. The adequate
production of both types of goods requires
government spending, in the form of subsidies
or outright production. Government spending of
this revenue accounted for 55.5% of total GDP in
2010, a slight drop from 56.1% in 2009.
Figure c: Real GDP = Nominal GDP - Inflation
3%
29%
68%
Finnish GDP 2011 -
Composition by sector
Primary
Secondary
Tertiary
Figure a
Figure b: seasonally adjusted GDP data removes the influence of
regular fluctuations in data
Figure d: Y, X, C and I, of {GDP (Y) = C + I + G + (X – M)} Gross fixed
capital formation is acquisition of durable capital, i.e. goods used in the
production of other goods that are not destroyed with use, e.g., a
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To what extent is Finland’s operation as a welfare state reflected in its macroeconomic indicators?
Tax is the main source of government revenue: in 2009, tax accounted for 95% of total government
revenue, and was equivalent to 53.4% of GDP. In Finland, income tax is progressive, meaning those
with higher incomes are taxed heavier percentages of their income, in addition to a fixed tax rate for
all income bands at 16% for municipal, church, and health insurance contributions. Income tax varies
between 6.5%-30%. Capital income (i.e. income from investment) is 28% paid to the State.
13% 3%3%
9%
0%1%
14%
2%
12%
43%
General Government Expenditure 2010 in Finland by
Function
General Public Services
Defence
Public Order and Safety
Economic affairs
Environmental Protection
Housing and Community Amenities
Health
Recreation, Culture and Religion
Education
Social protection
Figure e
Figure f
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To what extent is Finland’s operation as a welfare state reflected in its macroeconomic indicators?
The remainder of government revenue originates from state-owned companies. These companies
compete alongside private firms in a mixed economy, with the exception of some state monopolies,
such as Aiko and Alta, which collectively form the alcohol production and retail industry.
Inflation is a rise in prices in an economy. Inflation in Finland is measured through price change in a
Consumer Price Index consisting of a price-weighted basket of goods. Each month, government
takes the prices of 50,000 goods to calculate a monthly inflation rate based on their average
increase. The base year used to calculate inflation changes every 5 year interval, 2010 being the
latest base. The average inflation rate over 2011 was 3.4%. Finland’s average inflation rate is low
compared to that of Europe as a whole, estimated in 2010 to be 1.22% vs. 2.66%.
Figure g: Finnish state owned companies
Figure i: Finland’s inflation over time
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To what extent is Finland’s operation as a welfare state reflected in its macroeconomic indicators?
Unemployment in Finland in the 4th Quarter
of 2011 stood at 7.4%. This was an
improvement over the corresponding
quarter in previous years, unemployment
being 8.2% in 2009 Q4 and 8.4% in 2010 Q4.While the number of employed persons fell
by 0.4% in 2010, due to factors such as
retirement, incarceration, or death, the
labour-hour total increased by 1.1%,
reflecting a net increase in productivity.
1.36% of Finland’s population is estimated
to be in long-term, possibly structural
employment, which is successful in
comparison with the long-term
unemployment in the whole of Europe at
2.6%.
Analysis
From figures e, f, g, and j, we derive the following welfare state characteristics respectively: high
government expenditure on transfer payments, high tax rates relative to income, large quantity of
state services, and high employment in said services. Finland is a welfare state and a successful one
when compared to the rest of Europe, outperforming its neighbours in terms of GDP per capita,
inflation and unemployment.
Finland’s GDP and employment come heavily from the tertiary sector ( fig a, j ), which is characteristic
of an economically developed and competitive state. This, however, is not an effect of welfare
policies but a precedent. While not all economically successful states are welfare states, most
welfare states are economically strong; in order for a state to be a welfare state it must typically
have the developed infrastructure and excess capacity at hand in order to provide for its people.
The deconstruction of GDP in fig d reveals a miniscule proportion of private consumption and
investment in comparison to GDP as a whole. This is a telling consequence of the unification of a
high tax environment ( fig f ) and passive economic appetites bred by a welfare state. Investment tax
33%
Finnish Labour Force - By
Occupation
Agriculture and Forestry
Inudustry
Construction
Commerce
Finance, Insurance, and
Business services
Transport and Communications
Public Services
Figure j
Figure k: Unemployment
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To what extent is Finland’s operation as a welfare state reflected in its macroeconomic indicators?
stands at 28%, which is a massive disincentive for investment, while income taxes that swallow
nearly half of all income leave little room for disposable income.
In the light of the 2008 financial crisis, one notes that GDP growth and employment were both
negatively affected ( fig c, k ). GDP growth suffered slightly more than it did during the Finnish
banking crisis of the 1990’s. Unemployment suffered to a smaller extent . Inflation fell alongsidegrowth ( fig i ), which is natural, given that periods of low growth herald low incomes and thus low
spending, diminishing aggregate demand, causing a general fall in prices. Government could not
prevent an increase in unemployment that set a continually improving record of unemployment
back 10 years, and could not prevent a general decrease in prices despite their power as price
setters in their enterprises, evidencing the impotence of Finland’s welfare state practices in
controlling inflation and unemployment, which are two macroeconomic indicators that ultimately
affect the quality of living and self-sufficiency of the people.
In evaluation, while Finland’s macroeconomic indicators reflect its own characteristics as a welfare
state - i.e. Finland’s policies have influence in some dimension over the indicators - in times of crisis
or otherwise, Finland’s welfare policies are ultimately incapable of controlling these indicators, and
in answer to the question, Finland’s operation as a welfare state is reflected in its macroeconomic
indicators insofar as they affect but do not determine them.
Bibliography
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