Principles of

Macroeconomics

1st Problem Set – Group 69

March 2023

NOVA School of Business and Economics

Tiago Saramago – No 56520
João Gomes – No 56544
Pedro Cadete – No 56596
Francisca Pereira – No 56800

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This report aims to analyze the evolution of the increased again a year later. The fact that the country
Portuguese and Dutch economies over the last two experienced more significant decreases (-0,49%; -
decades, including the assessment of several component 0,08%; -1,29%; -2,52%, respectively), which can be
variables. attributed to increasing inflation as well, is responsible
for the yearly GDP decreases of -1,85% in the last
GDP evolution quarter of 2008 and -4,33%, -3,77%, -2,84% and-1,52%
In order to compare such different countries in terms of in each respective quarter of 2009. Once this was over,
population and productivity, as GDP values between the in 2010, both economies expanded, only to contract
two present huge discrepancies, growth rates ought to again in 2011 and 2012. The main reason behind this
be used. was the European sovereign debt crisis, in which
Note our analyses will be mostly based on real GDP countries of the Euro area with large public debts faced
growth rates, as they are the ones that most accurately extremely high interest rates on their loans from
represent the economy’s evolution. Thus, unless stated creditors from the Rest of the World. Clearly, this event
otherwise, we refer to real growth rates. had repercussions on all countries in the Euro area, but
some, those with higher sovereign debt, were more
affected than others. Portugal is one of those, with
quarterly GDP decreasing since the last quarter of 2010
until the last quarter of 2012. In yearly terms, this means
rates of -3,31% and -4,53%, in the last quarter of 2011
and of 2012. In the same period, in the Netherlands,
GDP also decreased, but not in such a linear way as in
Portugal. In fact, the yearly growth rates for the last
quarters of 2011 and 2012 were -0,12% and -1,28%,
respectively. From 2013 onwards, until 2019, both
economies exhibited a positive growth, with average
Figure 1 – GDP real growth rates in Portugal and in the rates of 2% to 3%.
Netherlands from 2012 to 2022 In 2020, when the Covid-19 pandemic broke out,
As with Portugal, the Netherlands performed well economies were significantly affected. GDP decreased
economically between 1995 and 2001. In the first significantly in the first two quarters of the year in the
quarter of 2002, with the adoption of the European Netherlands: -1,48% and -7,90% on a quarterly basis
Union’s currency, the Euro, GDP decreased (-0,61%). and -0,29% and -8,55% on a yearly basis. The same
This decrease was quickly overcome, and the economy happened in Portugal, with rates of -4,36% and -15,12%
kept growing. In Portugal, however, this pattern lasted on a quarterly basis and -2,58% and -17,78% on a yearly
throughout the whole year, which ended with a yearly basis. These values are expected, as countries
negative growth rate of -1,48%. After this, both completely locked down. Nevertheless, recovery was
economies picked up and growth started accelerating. fast: this is an example of how abrupt recessions can be
Prices seem to have increased as well, as real growth followed by quick expansions. In the last two quarters
rates are smaller than nominal ones, but no negative of 2020, the Netherlands had GDP growth rates of
impact was felt. Following a period of apparent 6,35% and -0,06% and Portugal had growth rates of
stability, both economies were affected by the Great 14,59% (an impressive recovery) and 0,37%. Despite
Financial Crisis (2008–2009). The Dutch GDP being an amazing recovery in both countries, relative to
decreased in the last two quarters of 2008 and in the first the huge decrease in the previous quarters, the
quarter of 2009 (-0,12%; -0,66%; -3,59%, respectively). economies did not grow in yearly terms: growth rates
This is why in the first quarter of 2009 the yearly growth for the last two quarters of 2020 were -3,12% and -
rate was -3,88% and this trend kept on for the rest of the 3,56% in the Netherlands and -6,21% and -6,63% in
year. On the other hand, Portugal seems to be a lot more Portugal. These values are, nonetheless, remarkable,
vulnerable to the global crisis, as its GDP started considering the predictions that the first two quarters of
decreasing in the second quarter of 2008 and only the year provided.

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Pandemic economic recovery stable, hovering between 66% and 67% of GDP. From
Both the Netherlands and Portugal have recovered to 2015 to 2019, the debt levels decreased steadily,
pre-pandemic GDP levels, although the timing of their reaching 48.5%. However, as with Portugal, the
recoveries have differed. COVID-19 pandemic led to an increase in debt in 2020,
According to data from Eurostat, the Netherlands' GDP reaching 54.7%. In 2021, the debt levels decreased to
in 2020 was 3.6% lower than in 2019. However, the 52.4%.
country's economy rebounded strongly in the second
quarter of 2021, growing by 3.75% compared to the
previous quarter. The Eurostat projected that the
Netherlands' GDP would grow by 6.17% in 2021 and
3.29% in 2022, which would bring it above its pre-
pandemic level.
Similarly, Portugal's GDP in 2020 was 6.6% lower than
in 2019, but the country saw strong economic growth in
the second quarter of 2021, with GDP increasing by
4.43% compared to the previous quarter. The Eurostat
projected that Portugal's GDP would grow by 6.2% in
2021 and 3.21% in 2022, which would also bring it Figure 2 – Government Debt as a percentage of GDP in Portugal and in
above its pre-pandemic level. the Netherlands from 2012 to 2022

While both the Netherlands and Portugal have been In the Netherlands, the government budget balance
affected by the pandemic, the Netherlands appears to exhibited a deficit from 2012 to 2015, although with a
have recovered faster than Portugal. One possible progressively increasing trend. Subsequently, from
reason for this is that the Netherlands has a more 2016 to 2019, the government budget balance showed a
diversified economy, with a strong manufacturing surplus, reaching its peak of 1.8% of nominal GDP in
sector and a robust services sector, including financial 2019. However, in 2020, the impact of the COVID-19
services. Portugal, on the other hand, relies heavily on pandemic resulted in a reversal of this trend, leading to
tourism, which was hit hard by the pandemic and may a deficit of 3.7% of nominal GDP.
have taken longer to recover. Regarding Portugal, the budget balance has consistently
exhibited a deficit over the past decade, although with a
trend towards improvement. In 2019, there was a
Government budget balance and public debt surplus of 0.1% of nominal GDP. However, in 2020, the
Over the preceding decade, the Netherlands and COVID-19 pandemic's effects led to a significant
Portuguese economies have demonstrated different increase in the deficit, reaching 5.8% of nominal GDP.
trajectories in terms of government budget balance and
debt as a percentage of nominal GDP.
In Portugal, government debt as a percentage of GDP
has consistently exceeded the country's GDP, with debt
levels ranging between 129% and 132% from 2012 to
2016. However, from 2016 onwards, debt levels have
been decreasing and reached 116.6% of GDP in 2019.
The COVID-19 pandemic led to an increase in debt in
2020, reaching 134%, which can be attributed to
increased spending on healthcare and economic support
measures as well as a decline in economic activity and
tax revenue. In 2021, the debt decreased again. In
contrast, the government debt as a percentage of GDP
Figure 3 – Budget Balance as a percentage of GDP in Portugal and in
in the Netherlands has consistently remained below the the Netherlands from 2012 to 2021
country's GDP. From 2012 to 2014, the debt levels were

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In both economies, the Covid-19 pandemic has had a loosely correspond to the outbreak of the invasion and
significant impact on the government budget balance to the annexation of four regions of Ukraine; the data
and debt, as a result of increased spending and declining seemingly demonstrating a delayed effect on the more
economic activity. Governments have had to increase peripheral Portuguese economy, compared to the more
spending on stimulus measures to support individuals central Dutch one. Core inflation in the same period was
and businesses affected by the pandemic, while also comparatively static, at 3,03% and 6,44% for the
experiencing decreased tax revenues due to decreased Netherlands and 5,73% and 6,34% for Portugal.
economic activity. The increase in government debt is a The last data available, from January 2023, could
concern, as it may lead to higher interest rates and lower suggest a stabilization, but it may also be a singular
economic growth in the long term. Nevertheless, the occurrence. The more curious observation is that
Netherlands entered the crisis with a stronger fiscal Portugal and the Netherlands’ inflation rates seem to be
position than Portugal, with a lower debt-to-GDP ratio converging around 8,5%. This may be worrying for
and a recent history of budget surpluses. This may give Portugal, which has previously shown values
the Netherlands more flexibility to manage the long- consistently lower than the Netherlands’.
term impact of the pandemic on their public finances.
In summary, the government budget balance and debt in
the Netherlands have been relatively stable over the last
10 years, with a significant deterioration in 2020 due to Inflation in the Netherlands
the COVID-19 pandemic. In contrast, in Portugal, the 20,00%
government budget balance has improved gradually, but 15,00%
the debt has been increasing consistently, and the 10,00%
5,00%
pandemic had a significant impact on both indicators.
0,00%
2020-01
2020-04
2020-07
2020-10
2021-01
2021-04
2021-07
2021-10
2022-01
2022-04
2022-07
2022-10
2023-01
Price evolution
Headline inflation Core inflation
Headline inflation mirrors the evolution of the HICP –
Harmonized Index of Consumer Prices –, whereas core
inflation refers to the evolution of Core CPI – the Figure 4 - Headline inflation and core inflation in the Netherlands
consumer price index which excludes volatile goods from 2020 to 2023 (Q1)

from the basket.

In 2020, core inflation was always higher than headline
inflation in the Netherlands, which means price Inflation rate in Portugal
increases were more significant in non-volatile goods. 15,00%
From March 2021 onward, this trend reversed, which
10,00%
can be explained by food prices increasing
considerably. The pattern continued and intensified in 5,00%
the last quarter of the year. Meanwhile, Portugal saw 0,00%
2020-01
2020-04
2020-07
2020-10
2021-01
2021-04
2021-07
2021-10
2022-01
2022-04
2022-07
2022-10
2023-01

headline and core inflation rates fluctuate at similar -5,00%

values, between 0,83% and -1,08% in 2020, whereas in
2021 headline inflation was always above core
Headline inflation Core inflation
inflation, exhibiting an increasing pattern as well.
Headline inflation increases continued in 2022,
Figure 5 - Headline inflation and core inflation rates in Portugal
especially towards the end of the first quarter, now from 2020 to 2023 (Q1)
attributed to the escalation of Russo-Ukrainian War. In
this context, both food and energy saw soaring prices,
which were reflected in peak (yearly) inflation rates of
11,67% in March for the Netherlands and 9,43% in July
for Portugal, and 17,06% in September for the
Netherlands and 10,57% in October for Portugal. These
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References:
https://chat.openai.com/chat
https://ec.europa.eu/eurostat/data/database
https://www.investopedia.com/
https://www.worldbank.org/en/home