There have been many big changes in the world economy. The history of the Eurozone is very important. The "United Kingdom" joining the Eurozone is looked at from both the pro and con points of view in this essay. The "Real Business Cycle (RBC) model" is what this study is based on. It's an interesting way to learn about things like business cycles, technological shocks, and productivity that affect the economy.
Macroeconomic Overview
As stated by Aryawati et al. (2023), from 2011 to 2023, the data will help to see how the economies of the UK, Croatia, and the Eurozone as a whole are doing. We will look at the unit labor cost, the rate of inflation, the ratio of debt to GDP, the ratio of government deficit to GDP, the yields on 10-year bonds, and the ratio of exports to GDP.
Inflation Rate
One very useful way to see how prices are changing in a country is to look at the inflation rate. From 2011 to 2023, we can see that inflation looks different in the Eurozone, Croatia, and the UK. Early in the 2010s, inflation in the Eurozone was low. It went up a lot in 2022, but then it went back down in 2023. (European Commission, 2023).Inflation rates were higher in Croatia, on the other hand, reaching a major high point in 2022. The United Kingdom displayed a more moderate inflation trajectory, with a noticeable increase in 2021 and a subsequent decline in 2022 (Brogi and Lagasio, 2019).
Figure 1: Inflation rate
Debt to GDP Ratio:
As stated by Belanche (2019), the debt to GDP ratio is a key metric reflecting a country's fiscal health. The Eurozone average witnessed an upward trend in debt levels, especially from 2021 to 2023, reaching 6.4% in 2023 (oecd.org, 2023). Croatia's debt to GDP ratio fluctuated but remained relatively stable, while the United Kingdom experienced a significant increase in debt from 2021 to 2022, followed by a slight decrease in 2023.
Long-term government bond yields provide insights into a country's borrowing costs. The Eurozone, Croatia, and the United Kingdom all witnessed fluctuations in 10-year sovereign yields. Notably, the Eurozone exhibited a declining trend, while both Croatia and the United Kingdom experienced fluctuating yields, reflecting changing market perceptions and economic conditions (Frost et al., 2019).
Figure 3: Long-term government bond yield
Unit Labour Costs:
As stated by Finkler, Calabrese and Smith (2022), unit labor costs represent the average cost of labor per unit of output, indicating labor efficiency and competitiveness. The Eurozone displayed a gradual increase in unit labor costs, while Croatia experienced fluctuations, including a sharp decline in 2022. The United Kingdom demonstrated a mixed pattern, with a notable increase in 2021 and a subsequent decrease in 2022.
Figure 4: Unit labour cost
GDP per Hour Worked:
GDP per hour worked reflects labor productivity, and the Eurozone, Croatia, and the United Kingdom exhibited varying trends. The Eurozone saw a steady increase, indicating improving productivity. Croatia experienced fluctuations with a peak in 2023, while the United Kingdom demonstrated a relatively stable trend with minor fluctuations (oecd.org, 2023) (Giese et al., 2019).
As per Hennart, Majocchi and Forlani (2019), the table shows GDP per hour worked in European Union-27 countries, Croatia, and the United Kingdom from 2011 to 2023. All three economies show an increasing trend in GDP per hour worked over the period. The United Kingdom has the highest GDP per hour worked throughout the period, followed by the European Union-27 countries and Croatia. During the time period, Croatia has the lowest GDP per hour worked. However, its economy has grown the most during that time.
General govt deficit
Figure 6: Government deficit
The number shows that in 2011 and 2012, both the Eurozone and the UK had negative deficits. That means both governments made more money than they spent during those years. However, since 2013, both countries' deficits have been positive. In other words, since then, both governments have spent more money than they have brought in (Huang, Rust and Maksimovic, 2019).
According to Shim (2022), the deficit in the Eurozone has changed more than the deficit in the UK. In 2020, the deficit in the Eurozone was 7.4% of GDP, which was the highest level ever. After that, it went down to 4.3% of GDP in 2022. 2020 was the worst year for the UK because it had a deficit of 10.3% of GDP. As of 2022, that amount had dropped to 5.1% of GDP.
2. Body: A model-based analysis
Introduction to the RBC Model
There is a great way to understand how the economy changes: the RBC model. This model looks at real things like business cycles, productivity, and technology shocks. Outside technological shocks that change how much people work, what they can expect, and prices are important parts (Frost et al., 2019).
Figure 7: Real Business Cycle (RBC) model
It's based on the idea that changes in the economy aren't brought about by changes in money supply, but by changes in how well people and money are used.
Application to the United Kingdom
As stated by Aryawati et al. (2023), it can be learnt more about how the UK's main economy works if you use the RBC model on that country. One of the most important parts of the model is productivity, which shows how well everything is being used. When technological shocks come from outside the economy, the RBC model looks at how they change output. This makes sense given how the UK's productivity has changed over time.
Changes in productivity can be explained by tech stocks, which are another important factor. The UK is a center for new technologies. As a result, these technologies change the way business cycles work. One good thing for the economy is that when people have a lot of new ideas, they get more done (Giese et al., 2019).
Comparison with Croatia and the Eurozone
According to Shim (2022), the RBC model helps us see how the UK economy works as a whole. A big part of the model that shows how well resources are being used is productivity. It fits with what RBC has found about how technological shocks from outside the economy affect work and how it has been done in the UK over the years.
As stated by Belanche (2019), surprise changes in technology are another big thing that can make people less productive. New technologies often change how businesses work in the UK because it is a hub for technological progress. In this case, people are more productive when they have a lot of new ideas. This is good for the economy.
Dynamics of the Analysis
It can be better understood the RBC model if you can picture how it works. It would be understandable better when it has been looked at pictures that connect business cycles, productivity, and sudden changes in technology. Check out the graph below to see how a technological shock from outside the UK changes income and, in turn, productivity (Frost et al., 2019).
As per Hennart, Majocchi and Forlani (2019), if you look at a chart that compares how the business cycles work in the UK, Croatia, and the Eurozone, you can better understand the model. We can quickly see how the RBC model works with these diagrams, which helps us better understand how it affects the economy.
As stated by Finkler, Calabrese and Smith (2022), we will talk about the results of the model-based analysis in more detail and give our honest opinions on the pros and cons of the UK joining the Eurozone in the next few sections. Between these two examples, we were able to figure out how to use the model to rate the economy of the chosen country.
3. Conclusions
Summary of Findings
The "Real Business Cycle (RBC)" model is a great way to learn about what might happen if the UK joins the Eurozone. It mostly shows how business cycles, sudden changes in technology, and low productivity all impact each other. We can use real-life examples to understand how the economy works. Because different parts of the UK are productive in different ways and the country has a strong tech base, joining the Eurozone could be good and bad for it.
They might be better at what they do, have fewer issues with monetary policy, and help more economies work together. But it might be hard to get used to a shared currency if you don't have control over your own money. The RBC model takes into account changes in productivity and technology stocks. These changes may have different impacts on the UK if it is in the Eurozone.
Assessment of Model Strengths
The RBC model effectively portrays economic difficulties, making Eurozone membership simpler to grasp. The model relies on productivity and technological shocks like the UK economy, which rewards innovation. Realistic models include fair expectations and pricing fluctuations. We can observe how business cycle rules evolve.
However, the model depends too much on outside technology stocks, which might simplify the actual economy. That salaries and prices may alter may not indicate market rigidity (Giese et al., 2019). Despite these shortcomings, the RBC model is excellent at predicting outcomes and capturing productivity-driven business cycles.
Complexity of Explaining Elements
The RBC model explains the business cycle, although a simpler model may be required for other macroeconomic difficulties. How international trade, currency rates, and fiscal policies influence the economy may need more complicated modelling.
The model may not account for the complex relationships between currency rates and trade balances, which are crucial for Eurozone applicants. It emphasizes technological shocks and productivity. A model must integrate actual and financial aspects to adequately examine them.
Variables Omitted by the Model
The RBC model has several advantages; however, it omits key aspects that may improve analysis. It doesn't consider how monetary policy, financial markets, and geopolitics impact things. The model doesn't consider monetary policy independence, which would affect the UK's Eurozone membership.
To complete the picture, future study should include central bank policies, financial market reactions, and geopolitical developments. These factors affect the economy and may help us weigh entering the Eurozone.
Critical Assessment
The RBC model test of the UK's ability to join the Eurozone shows how tough the issue is. The model shows that productivity is going up, but it doesn't show any changes in foreign politics or monetary policy. Giving up control over monetary policy is like giving up control over economic integration and efficiency.
Putting the RBC model together with other monetary element models will give you a more complete picture of joining the Eurozone. To make the right choice, you need to understand trade-offs and use a complex method that takes into account real and financial economic factors.
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Shim, J.K., 2022. Financial management. Professor of Finance and Accounting Queens College City University of New York.
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