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The Economy of Brazil

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    Brazil is a country of fast growth and development over the years, it is the sixth country with the highest nominal GDP which considered the leading economy in Latin American and the second largest in the western hemisphere. There are several economic events that trace the changes in the history of Brazil’s economy. Brazil was colonized by Portuguese in the 16th century when they enforced colonial treaty, trade policy which leads to the development the fallowing three centuries. The turning point for socioeconomics in Brazil was after World War II. Only 31. 3% of Brazil’s 41. million populations lived in cities and towns, however by 1991 with the population of 146. 9 million, 75. 5% resided in cities. This results in Brazil having two of the world’s largest metropolitan centers – Sao Paulo and Rio De Janeiro. In 1992 the shares of the primary sectors decrease from 28% in 1947 to 11%. On the other hand the number of contribution of industry to GNP increased from 20% in 1947 to 39% in 1992 (Investment U). This was a sign showing that Brazil is shifting from heavy reliable on primary industries to secondary industries and value added goods.

    There were a wide range of products for domestic markets and international markets, which includes consumer’s goods, intermediate goods, and capital goods. Unfortunately in 1980s and 1990s the economy of Brazil was disadvantage because of the weak cunrrency, which at the same time caused Brazil economic growth at the time to restrain. Several attempts, was put into action by the government unfortunately failed. However stability grew stronger in 1994 when Plano Real was introduced.

    Although the plan sustained Brazil economics growth and provided rapid development for the country, there are still high levels of corruption, violent crime, illiteracy and poverty. After gaining independence in 1822 Brazil’s relationship with US strengthens especially with the trades because US imported four times more then it exports to Brazil making it one of the most significant producers. From then until now Brazil became the largest coffee producer, it responsible for 30% of the world coffee production (Thomas White).

    Although this figure shows that Brazil is a country with good economy, the real prove to show that a country has a healthy economic growth depends on three main indicators, which are Gross Domestic Products, Inflation and Unemployment Rate. Therefore this report will be explaining the fluctuation of those indicators and explain the reasons behind it as well as trying to find the relationship between them by observing their correlation. Gross Domestic Product (PPP) The Gross Domestic Product growth rate provides a combined measure of changes in value of the goods and services produced by an economy.

    Brazil is one of the fastest growing and developing economies in the world. With large and growing agricultural, mining, manufacturing and service sectors, Brazil economy ranks highest among all the South American countries and it has also obtained a strong position in global economy. Historically, Brazil GDP Growth Rates average 0. 76% and its can goes up to 4. 50 % it mean the Gross Domestic Product is slightly high most of the time from 1996 – 2012 and a record low of -4. 20 % in December of 2008. The Gross Domestic Product in Brazil expanded to 0. 0% in the second quarter of 2012 over the previous quarter (Index mundi, 2012). Between 2002 and 2008, Brazil got a benefit from global growth with its demand force commodities, the production of which Brazil has an undeniable comparative advantage. Between August of 2002 and August of 2005, the price of Brazil semi-manufactured exports rose by 43 percent and the price of its basic productions by 59 percent (Index mundi, 2012). The benefits succeeded by the positive shock of the term of trade to the economy were visible.

    The exchange rate appreciation allowed for the reduction in the external debt and the increase in the prices of exports on investment for the production or raw materials was remarkable. Such prosperity came under threat in the second half of 2008 as are result of the global financial crisis (Maps of World). In the past, exchange rate analysis resulting from external shocks would cause at least two serious problems, first of all, inflation and an increase in the public debt/GDP ratio (because part of the debt was indexed to the dollars).

    Second, The Central Bank would be force to increase the interest rate in order to control the inflationary effort of the currency devaluation. In turn, this measure contributed to a new rise in public debt. To maintain confidence in the solvency of the public sector, the government would have to change mini issue such as increasing primary surplus. Both the financial and the tax policies multiplied the external shocks contracting impact, aggravating the recession induces by the external shock.

    Unfortunately, to what has happened in the past, the devaluation of the Real did not translate into an increase of the public debt during the crisis at the end of 2008. On the other hand, there was a profit that created a margin for emergency financial aid actions. The high international reserve served to moderate part of the evaluation shock, which brought disadvantages for companies that speculated in the exchange rate derivatives market. However, there was no capital flight and the Central Bank was also able to reduce interest rates.

    Inflation To clearly understand Brazil’s economic situation understanding what inflation is crucial to decide weather is it good or bad for the economy. Inflation is a rise in the general level of prices of goods and services in an economy. When this happenes it will mean that each unit of the currency will be able to buys fewer goods or services. In other word, inflation also reflects a loss of real value also known as an erosion in the purchasing power of money (Index Mundi, 2012).

    Inflation rate measures the rate of the rise or fall in prices or the value of the currency that consumers pays for goods and services. There are two types of inflation, one is cost-push inflation and another is demand-pull inflation. While the Cost-push inflation happens when there is an increase in the factors of production which means that organization will also rise the price of the product, the demand-pull inflation is when there is a high rate of demand at the same time there are scarce supply so organization will push the price up in order to try to gain more profit.

    In just 30 years, the combined inflation in Brazil reached 1,000,000,000,000,000% (1 trillion) from 1964 to 1994. The main reason for the high inflation in Brazil was because of the recurrently weak macroeconomic fundamentals in Brazil. Another Primary result of the high inflation was also because governments in Brazil printed money around the clock and could easily spend the budget (carte blanche). Brazil has a very complicated economy that only in 1994 when the Real was introduced that the inflation was solved.

    Real was a big success because investors began to gain confidence with it that in 2004, when a bond issue was created which provided protection for Brazil’s Real against fluctuation and international economic instability (Inter-American Development Bank, 2004). The bond is packed together with dollar which makes this package prevents it from hyperinflation. Historically, Brazil rate of inflation before 2001 did not have a drastic move like in the year 2002 and 2003 with the highest rate of inflation at high of 14 percent in 2003 and a record low of around 3 percent in 2006 (Inflation. eu, 2012).

    Meanwhile, from 1980 until 2012, Brazil Inflation Rate averaged 415. 0 Percent. The highest of inflation of all time in Brazil is 6821. 3 Percent in April of 1990 while a record low of 1. 7 Percent in December of 1998 (Inflation. eu, 2012). As shown on the inflation graph it is clear that there was a big movement in inflation rate in 2002 and this might be to political reason because it was the time of a presidential voting (Appendix 2). Since politic is also a big cause of economical change this might be one of the many reason as to why in 2003 the inflation rate rose to around 14 percent.

    While it is said that after President Luiz Inacio Lula da Silva won the election in 2002, Brazil developed even more rapidly. This might also be the reason for the high inflation because going back to cost-push inflation, when an organization develop it means that more people will be working so organization will have to spend more for the factors of production which will lead to an increase in price of the product and services. However the inflation rates fell drastically in 2004, and continue to do so until the next presidential election in 2006.

    Therefore the most likely reason of the rise in inflation in 2002, 2006 is because of the political situation of a country. In 2010, when another presidential election took place the election remains the same but a year after that which was in 2011the inflation rate increase again. Perhaps it was because after the election Brazil started developing really fast like it did in 2002 again. The graph also shows that after 2004 when the bond issues took place the inflation rate did not have a vast movement like in 2002 and 2003 where there was around 10 percent leap.

    This might be the reason why after 2004 the fluctuation of the inflation rate did not spread over 10 percent in just 2 years like in the past. Unemployment Rate Unemployment is one the main factors to look at when studying a country’s economy therefore understanding what is really is necessary. Unemployment is the number labor force that is without jobs in the country expressed in percentage. In one year Brazil experience numerous fluctuations of Unemployment rate. However generally speaking the unemployment rate for the past ten years has declining (Appendix 3).

    Historically from 2001 to 2012, Brazil unemployment rate averaged 11. 6% meanwhile in 2002, where unemployment rate was about an averaged of 9. 19%, In April of 2004 the rate of unemployment rate rose, which was an all time high of 13. 10%. Fortunately, after President Lula da Silva took the office, the unemployment rate dropped to 11. 40% by the end of the year. There was also minor decrease in 2005 with unemployment rate of 11. 5%. In 2006, the unemployment rate of Brazil fell further to 9. 8%. This followed by an even further decrease in 2007 to 9. %. In 2008 the unemployment rate dropped to 3. 9 % however the number increased by 5. 6% in 2009 and a record low of -4. 1% in December of 2011 (Index Mundi, 2012). The yearly unemployment rate graph, shows that after the presidential elections in 2002 the rate slowly decrease and there is not one year where the rate increase so this is a good sign that the country is heading the right way. Each time there is a presidential election there are almost an exact line on the graph as the other as shown on appendix 4 and 5.

    This shows me that the government is repeating the similar techniques to improve the economic state of Brazil. It so happens that president President Luiz Inacio Lula da Silva won both election in 2002 and 2006. As mention before in the report it was said that after president Lula was elected in 2002 he brought Brazil forward and develop it rapidly. In 2006 where the unemployment rate fluctuates also in an exact position means that President Lula succeeded again in developing Brazil (Appendix 5 and 6).

    Currently Brazil is third in the world in term of the unemployed number, jobless fell from 6. 2% in June to 6% in July 2012 (Maps of World). The unemployment rate in Brazil was last reported in 5. 40% in September 2012. Even with continues decrease in unemployment in Brazil it continues to be a big problem to the economical growth because there is no system of social protection. Another reason why this continues decrease in unemployment is still a problem is because Brazil’s population continue to bloom because large number of people migrates there.

    With the huge population there are approximately 40 million who lives below the poverty line while unemployment is a major cause for in equal distribution of wealth, benefits and social services in Brazil (Global Finance). On top of that the privatization of many public services such as education, health services, public transportation, electricity to communication services, helps expands the distance between the rich and the poor. However by privatizing more products and service means that the country is in need of more labor to produce more goods.

    This will then continue to decrease the unemployment rate as shown in the yearly unemployment graph. Correlation of Inflation and Unemployment Therefore different actions have different effects on the three factor of economy, this is why there are economist that tries to find the correlation between these three factors. Economist used curves and diagrams such as the Phillips curve to compare the two to show weather there are related to one another or not (Maps of World). To explain this clearly lets take Brazil inflation and unemployment rate as an example.

    An organization wants expand therefore they will need more factors of production compared to before, at the same time the organization will have to increase their spending leading to an increase in the cost of production (Spark Notes). When this happens it is necessary to increase the price of goods or services. In cases like this, the inflation is call “cost-push inflation”. However in other situations where the demand is high but supply is limited and cause inflation, its call “ demand-pull inflation. In other words if labor was limited and the demand for them increase, this will cause the price of hiring labor more expensive.

    In this case the inflation is call demand-pull inflation. This shows why there is a correlation between unemployment and inflation. Unfortunately these two factors are related in the short run and not the long run, therefore comparing the two with the annual rate will not be as accurate as the monthly rate. It can be concluded that when an organization aims to lower the rate of unemployment, they would have to bear the increase rate of inflation in the national economy. Correlation of Unemployment and Gross Domestic Product

    The clear relationship between unemployment rate and GDP is stated in the Okun’s law from the late economist Arthur Okun (Trading Econmis, 2012), in which the higher the GDP it means that the lower the unemployment rate is going to be. It’s obvious that in order to increase GDP it is necessary to increase the factors of product and in this case labor which will then pull the unemployment rate down. (Trading Economics, 2012). However other economist had different opinions like Ben Bernanke, who worked with Andrew Abel before joining the Fed suggested that about 2% decrease in GDP is equals to 1% increase of unemployment.

    Correlation of Inflation and Gross Domestic Product Pretend that Brazil is a country with really high GDP and a low unemployment rate since they have negative correlation, this would mean that the people of the country is generally rich. Which means that they have the money to spend so demand for goods and services would increase fast then the supply and like mention above there are two types of inflation in this situation it will lead to a demand-pull inflation shown in appendix 6 (Barnes, 2010).

    When a country have an unemployment rate of near full employment the cost of labor would increase which lead a rise in price since organization would look to maximize their profit. This can also be call as the cost-push inflation mention before. The Basic idea behind this is that as more people work the lower the unemployment rate and the higher the GDP will be, causing organizations to spend more on labor, and at the same time consumers have more money and spend more.

    Which results in consumers demanding more goods and services, finally causing the prices of goods and services to increase which then continue to increase the inflation rate. (Spark Notes). Conclusion In conclusion it is obvious that all the three factors are al inter-connected, this means that if a country wants to develop their economy they would have to make sure that all three of them is in a decent condition. According to the inflation, GDP and unemployment rate in Brazil it seems that it is a country with really strong economy and is continuing to do so.

    Although there are a lot of fluctuation in the inflation, GDP and unemployment in Brazil economy is slowly improving. Looking at the graphs it also shows that out of the three factors of economic indicators, the strongest correlation is between GDP and unemployment, because as one rise another will fall and it shown clearly about their natural negative relationship. The other economic indicator that has a negative correlation is unemployment and inflation.

    As mention above when the rate of unemployment decrease the inflation increase, the reason being is that labor force would be scarce and therefore cause a cost-push inflation up. The correlation of these two factors is as strong as the correlation between GDP and inflation but not as strong as the correlation between GDP and unemployment. The only positive correlation is between GDP and inflation where an increase in GDP will cause a demand-pull inflation. However all of them are equally necessary for a country economic development to happen.

    In the future Brazil will have to make sure that unemployment rate will not be too low to a point that the price of the factors of production will increase because this will have a negative effect on the economy as a whole. Although the GDP and inflation rate of Brazil is considered healthy, the government should also be careful that both remains stable. However the most important aspect for Brazil is to continue making sure that its currency continue to be stronger because although a bond was create there is still problem with the fluctuation of the Brazilian Real.

    Bibliography

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    Retrieved November 28, 2012 from Brazil Inflation Rate: http://www.indexmundi.com/g/g.aspx?c=br&v=71 Inflation.eu. (2012, November 19). Retrieved December 1, 2012 from Inflation Brazil – current Brazilian inflation: http://www.inflation.eu/inflation-rates/brazil/inflation-brazil.aspx IMF. (2012, October 9). Retrieved November 28, 2012 from World Economic Outlook Database: http://www.imf.org/external/ns/cs.aspx?id=28 Maps of World. (n.d.). Retrieved Decemeber 1, 2012 from Brazil Economy: http://www.mapsofworld.com/south-america/economy/brazil.html McBride, B. (2009, November 7). Calculated Risk Finace & Economics. Retrieved Novemeber 30, 2012 from Unemployment and GDP: http://www.calculatedriskblog.com/2009/07/unemployment-and-gdp.html#2jigSCTcbmh0vCeE.99 Spark Notes. (n.d.). Retrieved December 2, 2012 from The Tradeoff Between Inflation and Unemployment: http://www.sparknotes.com/economics/macro/measuring2/section3.rhtml Thomas White. (n.d.). Retrieved November 28, 2012 from Brazil: Beyond Natural Riches: http://www.thomaswhite.com/explore-the-world/brazil.aspx Trading Econmis. (2012, November 14). Retrieved November 29, 2012 from GDP Growth Rates: http://www.tradingeconomics.com/brazil/inflation-cpi Trading Economics. (2012, November 14). Retrieved November 29, 2012 from Brazil Unemployment Rate: http://www.tradingeconomics.com/brazil/unemployment-rate

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