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Comparison of Croatia and Uraguay's Economies

2844 words (11 pages) Business Assignment

30th Nov 2020 Business Assignment Reference this

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Croatia and Uruguay are two countries on opposite sides of the equator. Uruguay has a bigger land area and lies about 2,000 miles south of the equator, while Croatia has a larger population and lies roughly 3,000 miles north of the equator. Given such different geography, land possession, and population, it makes sense to infer the two also have contrasting economies and standards of living. This paper compares Croatia and Uruguay to determine which country has a stronger economy by analyzing the following economic indicators of each country: Gross domestic product (GDP), gross domestic product per capita, purchasing power parity, and political stability.

GDP

The first economic indicator of a country’s health is its Gross Domestic Product (GDP). The GDP measures the economic performance of a country by calculating the full value of the total goods and services produced by a country within a specific time period (“Definitions & Notes”). When calculating the GDP of a country, it is necessary to consider the nation’s medium of exchange and convert it into a common currency. Using a common currency is important in order to make it possible to compare countries to one another accurately. Due to fluctuating market exchange rates, the most common currency used to determine GDP is the hypothetical international dollar. However, in this example, when comparing the GDP of Croatia with the GDP of Uruguay, the Croatian Kuna and the Uruguayan peso are converted into U.S. dollars. In addition to establishing a common currency, it’s valuable to analyze the sources of GDP output for each country to determine and predict the stability of each nation’s GDP. The sources of GDP output are telling of which direction each country’s economy is heading.

Croatia

In 2017, the GDP in Croatia was documented at a value of $66 billion USD (“Croatia-The world in figures”). The Financial Times reported that about “one fifth” of this value stemmed from the country’s tourism sector (Byrne par. 2). More recently, the country’s tourism has exploded due to the popularity of the Home Box Office Inc. (HBO) series “Game of Thrones,” which was filmed in the city of Dubrovnik (Rigby 2). Yet, despite the flocks of tourists descending on Croatia, problems such as overcrowding and a lack of infrastructure development, like hotels, has caused Croatia to limit its number of visitors and rethink its reliance on tourism for GDP output (Rigby 3). One way Croatia is addressing its dependence on tourism, is by trying to enter the energy market. Specifically, Croatia is working towards opening “a floating liquefied natural gas regasification terminal… to import LNG [liquefied natural gas] for re-distribution in southeast Europe” (“Croatia-World Factbook”). In addition to making efforts to obtain reliable sources for increased GDP output, Croatia has taken other steps to improve its economy. One of these steps was that it “joined the European Union” with a plan to adopt its currency, “the Euro”, by the year “2024” (“Croatia-World Factbook”). Croatia is still in the process of reorganizing and has managed to stay afloat with a GDP growth rate of 2.9% in 2017 (“Croatia-World Factbook”).  

Uruguay

In Uruguay, the GDP was reported to be $49 billion USD, in 2017 (“Uruguay-The world in figures”). The Economist concluded that 20% of this GDP value was contributed by its exports (“The Magic of Montevido” par. 7). One of the benefits of Uruguay is that it has a free market economy and a trade agreement with several South American nations (“Uruguay-The world in figures”). This has played a role in Uruguay’s GDP growth as a result of “export-oriented” trade (“Uruguay-World Factbook”). One problem with Uruguay’s reliance on exports for its GDP, however, is that it “can’t control…demand” and, therefore, runs a big risk should demand drop (“Uruguay” par. 4). As a result, Uruguay is making strides towards attracting investors, growing its credit rating, and buying dollars with its “peso-denominated debt” (“Uruguay” pars. 3-4). So far, Uruguay has gained the respect and trust in the international investment community by maintaining a good relationship with its creditors. Its GDP growth rate is floating at 2.7% (“Uruguay-World Factbook).

Analysis

Based on the data reported by The Economist, the GDPs of Croatia and Uruguay had a difference of $17 billion USD (“Croatia-World in figures”; “Uruguay-World in figures”). This is considering the way that these two counties really far away that generate their gross domestic product in very different ways be able to produce almost the same amount of GDP. This bring into mind that the population also plays a big role in portraying a better

GDP per Capita

The second economic indicator of a country’s stability is the gross domestic product per capita. GDP per capita, like GDP, measures a country’s economic overall output/performance; however, what separates the GDP per Capita from the GDP is that the per capita takes a country’s population into account (“Definitions & Notes”). GDP per capita is produced simply by dividing the gross domestic product by the total population of a nation (“Definitions & Notes”). Accounting for a country’s population gives economists a good estimate of a nation’s average citizen standard of living. Yet, while GDP per capita is useful for comparing the economic wellbeing and standard of living of a country, it fails to consider the wage gap and the cost of living. Despite this flaw, evaluating a country’s GDP per capita is important, as it plays a vital role in a country’s job growth and market because investors often look at a nation’s markets growth rate in order to invest in that country. Furthermore, in the comparison of Croatia and Uruguay, countries with very distinct populations, the GDP per capita is very telling of their economic differences.

Croatia

As previously mentioned, Croatia’s GDP in 2017 was $66 billion USD (“Croatia-The world in figures”). In order to determine Croatia’s GDP per capita, Croatia’s GDP is divided by its 2017 population of 4.5 million (“Croatia-The world in figures”). The result of this is a GDP per capita of $14,760 USD for the year 2017. This figure gives us an estimate number of how much money each citizen of Croatia would have if its wealth was divided equally among all citizens.             

Uruguay

Following the same process, in order to find the GDP per capita of Uruguay, its 2017 GDP of $46 billion USD is divided by its estimated 2017 population of 3.4 million people (“Uruguay-The world in figures).  This results in a GDP per capita of $14,610 USD for the year 2017.

Analysis

Despite having vastly different populations, the GDP per capita percent difference between Croatia and Uruguay is only 1%, the equivalent of $150 USD. If Croatia had a slightly lower GDP, then both countries would have the same exact GDP per capita even though Uruguay has a significantly lower population. This fact reveals that Croatia’s large population plays a large role in its higher GDP per capita rate than Uruguay. It also says a lot about the strength of Uruguay’s economy that it can go head to head with a bigger populated country. Even more telling is the fact that Uruguay has “one of the highest incomes per person” and a middle-class growth “from 39% to 71%” (“The magic of Montevido” par. 6).

Currency Exchange Rates in the World Market / Purchasing Power Parity

 Another way economists determine a country’s health is by comparing countries’ purchasing power parity (PPP). Purchasing power parity is a theoretical exchange rate that allows you to buy the same amount of goods and services in every country (“Economics A-Z”). Economists use this exchange rate to get a better idea of the real values of GDP and GDP per capita in countries with different currencies. As mentioned before, in order to effectively compare countries with different monetary exchange, it is necessary to use a common currency: the international dollar.

Croatia

Croatia’s gross domestic product at purchasing power parity in 2017 was $83 billion international USD and the GDP per capita at purchasing power parity in 2017 was at $18,550 international USD according (“Croatia-The world in figures”). When Croatia’s GDP and the GDP per capita are analyzed at its purchasing power parity, its output increases from $66 billion USD to $83 billion international USD and from $14,760 USD to $18,550 international USD (“Croatia-The world in figures”). This means that when currency exchange is accounted for through purchasing power parity, there is a 25% increase in output of GDP and GDP per capita.

Uruguay

Likewise, Uruguay’s values also increase when purchasing power parity is accounted for. Uruguay’s gross domestic product at purchasing power parity in 2017 was $55 billion international USD and the GDP per capita at purchasing power parity in 2017 was at $16,150 international USD (“Uruguay-The world in figures”). When comparing Uruguay’s GDP and the GDP per capita before and after considering purchasing power parity, the output increases from $49 billion USD to $55 billion international USD and from $14,610 USD to $16,150 international USD, respectively (“Uruguay-The world in figures”). This means that Uruguay’s GDP increases by 12.24 % and its GDP per capita increases by 10.54 % when adjusted for currency conversion rates.

Analysis

The value of comparing both GDP and GDP per capita with purchasing power parity (PPP) applied, is clear in the following results. Prior to considering PPP, Croatia’s economic output appeared to be very close to Uruguay’s. However, when comparing the GDP (PPP) and GDP per capita (PPP) in 2017 between Croatia and Uruguay, it becomes evident that Croatia actually had a much bigger gap in GDP (PPP) and GDP per capita (PPP) than Uruguay. Croatia outnumbered Uruguay by $28 billion international USD in its GDP output and by $2,400 international USD in its GDP per capita (PPP). After considering the purchasing power parity its much easier to see that Croatia’s output is much larger than Uruguay’s than when using normal GDP and GDP per capita.

Political Stability

The final economic indicator for a country’s health is its political stability. It is important to take into account the political stability of a country because turbulent politics make a negative impression on international investors. Political conflicts which results in things like riots, looting and government shutdowns or takeovers can lead to a disruption of business.

Croatia

There are several factors that contribute to Croatia’s political stability. According to the Central Intelligence Agency (CIA), Croatia is a new country that has only been around a few decades and has only recently been admitted to the European Union (“Croatia-World Factbook). This makes it easier to establish new laws and regulations. One factor that complicates the stability of Croatia, however, is its large population with a growing number of refugees and immigrants. Croatia’s inability to keep up its infrastructure with its growing population challenges its political stability.

Uruguay

Uruguay’s political stability is due to excellent foreign relations, building trust with its citizens and foreign investors, and its low corruption. Uruguay has been cited as one of the least corrupt countries in the world and has one of the highest “income per person” (“The magic of Montevido”).  Due to it’s more equal wealth distribution and smaller population, Uruguay has a very stable political climate.

Analysis

When comparing political stability between Uruguay and Croatia, they are both very stable, but Uruguay is more highly regarded.  One big factor in this is immigration. Unlike Croatia, Uruguay doesn’t have to deal with problems arising from refugees and a large population. It is much easier to manage and distribute wealth with a smaller population. Therefore, when it comes to political stability, Uruguay ranks higher.

Conclusion

In conclusion, when comparing Croatia and Uruguay through the economic indicators, it would appear that Croatia has a slightly better GDP, GDP per Capita, and a much better GDP (PPP) and GDP per capita (PPP). However, when observing the political stability of both countries, Uruguay has a much more stellar record. In addition, GDP (PPP) and GDP per capita (PPP) do not take into account other factors which truly determine a better standard of living. For example, GDP (PPP) takes into account overall output or growth rate, but it doesn’t take int consideration that while a nation may be producing/earning more it doesn’t mean individuals are earning/producing more. In short, it doesn’t really account for wage disparities. Also, it neither account for factors such as pollution, public health, or leisure time. For example, Croatia may be producing more than Uruguay, but its citizens may not have as much leisure time as Uruguay’s citizens. Based on the quality of life, it makes sense to conclude that Uruguay has the real better economy.

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