Sample Economics Paper on The spread of the COVID-19 virus

The spread of the COVID-19 virus has heavily impacted all sectors of the Spanish economy. The food production sector has been heavily shaken by the sudden and large increase in demand. Supply was rapidly increased to address. The demand and supply shocks in the food production industry have caused little or no change in the prices of food. For instance, the demand of fruits, such as apples, has more than doubled since the outbreak of the pandemic. Consumers rushed to purchase large quantities, which resulted in empty shelves in markets since supply was insufficient (“Analysis: Spain rises to coronavirus challenge,” 2020). The decline in the demand for fruits by eateries, restaurants, and hotels was overrun by the increase in consumer demand for fruits. All other factors constant, an increase in demand for apples leads to an increase in its price.

The supply of apples increased in response to the increase in consumer demand. The production of food commodities in Spain continued and was not slowed down or halted due to the pandemic since food production is an essential industry in the Spanish economy (Askew, 2020). Once the supply of fruits was increased, the increased consumer demand was met and there were fewer cases of shortages in markets. All other factors constant, an increase in supply of fruits, such as apples, causes a decrease in price of fruits in the market.

Source: Self

Suppose price before the pandemic was PE and quantity supplied was QE. After the pandemic hit, demand increased and the new price became P1. Once supply was increased, the price reduced to P2 and quantity supplied increased to Q2.

Part 2

The travel and tourism industry is one of the largest in the Spanish economy, catering to up to 11% of the country’s GDP. It has shown great potential and is a major industry in the Spanish economy. After the outbreak and spread of COVID-19, all sectors of the Spanish economy have been adversely affected. The travel and tourism industry has been hit hard by the pandemic and brought to a sudden pause.

Both the demand and supply sides of the industry have been affected by the pandemic. Sales of travel and vacation tickets have recorded a large decline during the outbreak of the pandemic due to a decrease in demand. Given the widespread scare caused by the pandemic, unemployment resulting from industries cutting down the quantity of labor, employees having to take mandatory pay-cuts, uncertainty in the economy, and difficulty and restriction of movement, demand in the travel and tourism sector has greatly decreased (“Ministry of industry, trade and tourism – COVID-19 news,” n.d.). China accounts for over 35% of the travel and tourism visitors in Spain. With the restriction of movement in China as a result of the disease since it first began in the epicenter Wuhan, the Spanish travel and tourism industry has recorded huge declines in demand and ticket sales have been decreasing rapidly. The reduced number of tourists from China has also dealt a heavy blow to the Spanish retail industry dealing in luxuries and clothing. The COVID-19 pandemic has drastically reduced demand in the Spanish travel and tourism industry.

The travel industry also recorded a decrease in the supply. Given the strict measures put in place to curb the disease, such as closure of schools, public gatherings events, and even trips, the industry is unable to provide any information regarding travel and tourism spots to the people. The government imposed a ban on the state body arranging holidays, causing a halt in the sudden halt in the sector (Burgen, 2020). With no available events, such as football matches, tourism packages, and festivals, to be attended, the Spanish travel and tourism industry’s supply has recorded the largest decline ever, with supply falling almost to zero.

The decrease in supply and demand for in the travel and tourism industry has brought the sector to its knees, a situation the the government of Spain is trying its best to curb. As a result of the minimal to zero transactions in the industry during the pandemic, it has come to a sudden halt, making it difficult to determine the price level in the industry. Due to the heavy losses in the industry, the Spanish economy is expected to suffer a decrease in its GDP.

There has been a decrease in both the demand and supply in the travel and tourism industry in Spain. With the threat of COVID-19 still far from over, a lot of uncertainty exists in the industry.

Second Section

Part 1

The COVID-19 pandemic has had adverse effects on all sectors of the Spanish economy. Indices of consumption, investment, and net exports have all recorded declines during the pandemic. However, government expenditure has increased. Spain’s GDP has contracted during the pandemic.

Components of GDP include consumption, investment, government spending, and net exports. Spain’s GDP has contracted by over 10% during the COVID-19 pandemic, as shown by its components (“Spain’s economy set to suffer most from coronavirus crisis,” 2020). Consumption recorded a decline of about 49% since the pandemic hit. Households and consumers reduced their daily spending by approximately half due to the uncertainty in the economy. Demand has focused on necessities, such as food and pharmaceutical materials (“Economic activity has halved during Spain’s coronavirus lockdown, study suggests,” 2020). Moreover, the lay-offs of employees in various sectors have resulted in decreased consumption in the country. The closure of businesses has also contributed to the decrease in consumption as income earned has drastically decreased.

Investment also recorded a major decline. Financial markets have become highly unstable as a result of the pandemic. The financial market in Spain experienced a major crash that saw the stock market experience a record 14% drop in a day (Roldan et al., 2020). Investors lost massive amounts of money and the government efforts to improve the situation were unsuccessful. Investors’ fears were increasing as the stock market recorded further falls, causing many investors to hold off any additional investment (Forte, 2020). Investment in the financial markets recorded heavy losses. Businesses also resulted to delaying any investments due to the market uncertainty as a result of the pandemic. Inflows from foreign direct investments (FDI) also decreased with the spread of COVID-19. This has contributed to the global contraction of FDI.

Before the COVID-19 pandemic, Spanish exports were steadily increasing. However, given the redirection of resources to produce basic commodities, production in other sectors decreased, leading to a decrease in exports. Additionally, restriction of movement has disrupted all foreign trade activities not only in Spain but also globally (“Spain: Coronavirus disrupts the historic peak of Spanish exports,” 2020). Exports recorded a decline as most countries focused on obtaining consumer-oriented products for their citizens during the pandemic as compared to producer goods. Imports also declined but the decline was less than that of exports as a result of Spain importing consumer-oriented commodities during the pandemic. In conclusion, Spain recorded a negative net exports ratio.

Government expenditure has recorded a huge increase. Spain, being a part of European Union, agreed with other members on the allocation of a 500 billion Euros stimulus package to help cushion its citizens from the adverse effects of the pandemic (“Spanish PM sees ‘slow and gradual’ end to lockdown,” 2020). Moreover, a package of emergency spending worth 14 billion Euros was allocated to help small and medium business to recover from the effects of the pandemic. The increase in government expenditure was meant to help the Spanish economy recover from the effects of the COVID-19 pandemic.

In conclusion, most of the indicators of GDP recorded a decline, with only government expenditure increasing. The overall result is a decline in GDP of the country. Therefore, the pandemic has led to a decrease in Spain’s GDP.

Part 2

The COVID-19 pandemic has resulted in large masses of people losing their jobs globally. In Spain, the situation was even worse as the tourism sector was heavily hit by the pandemic. The Spanish economy was near the full-employment level with a very low unemployment level of 3.5% prior to the COVID-19 crisis. The decrease in aggregate demand in the country, the interruption of supply chains, and the instability of the financial markets have all contributed to the increasing unemployment rate. The labor market has been negatively affected by the pandemic, and is facing a lot of uncertainties as a result.

All industries in the Spanish economy laid off numerous employees since the pandemic hit the country. As of May 2020, the unemployment rate in Spain stood at approximately 14.5%. The tourism industry, which is the country’s largest industry, recorded a large lay-off of employees. The construction sector recorded approximately 22.92% lay-offs of employees. Generally, the service sector recorded an extremely large number of lay-offs. The numbers in each sector are very alarming. About 4 million people were temporarily laid off. Though believe that these lay-offs are temporary, there is still a lot of uncertainty concerning whether these lay-offs will become permanent or remain temporary as the spread of COVID-19 continues. The small and medium scale businesses, which provide employment for about 70% of the total employed, have been the worst hit due to their vulnerability. Small scale businesses have limited resources even though they provide employment for many people. Therefore, in such situations, they are forced to lay-off many employees to survive. Many of these businesses have recorded extremely large numbers of lay-offs and are not sure of survival due to the pandemic.

The labor participation rate declined by 26% as the pandemic continued to spread. The active labor participation rate declined by over 26% (Amaro, 2020). Additionally, the number of employees working under temporary contracts decreased by almost 17%, while the number of employees unable to find permanent full-time jobs also increased. The number of unemployed people under the age of 25 years rose to 33%, while the number of unemployed aged between 25 years to 30 years increased by 13.1% (Miguel Angel Garcia Vega, 2020). Wages have also dropped for those on wage pay. The unemployment rate is still expected to rise further.

The labor market in Spain remains uncertain as to when unemployment will drastically reduce and things go back to normal. Though the country has slowly begun to open up the economy, it will take a long time to get the economy back to its previous unemployment rates.

Part 3

            The spread of COVID-19 has had adverse effects on the Spanish economy as well as the global economy. It has heavily impacted every aspect of people’s lives and led to uncertainty in the country in terms of price level and inflation, employment, and GDP. Inflation rate in Spain has decreased since the onset of the pandemic.

Both the aggregate demand and aggregate supply of the economy experienced sudden shocks. The pandemic has prevented people from carrying out their daily activities, such as going to work, due to fear of contracting the disease. Therefore, productivity has decreased. Additionally, some employees may have contracted the disease, making them unable to work. Limited labor supply in almost all industries in the country due to the lay-offs as a result of the disease has also reduced productivity. Since productivity and labor supply in the country has decreased, aggregate supply in the country has also decreased. The restriction of travel within and without Spain for over a month has also led to the disruption of supply chains (Roldan et al., 2020). This has contributed to a decreased aggregate supply in the economy.

On the demand side, social distancing measures and restriction of movement put in place by the government have led to decreased demand in various sectors such as travel, eateries and restaurants, and shopping malls, among others. Moreover, most consumers have directed their demand towards necessities, such as food, due to the uncertainty in the economy, resulting in decreased aggregate demand in all other sectors. Most other countries have also focused on providing basic commodities for their citizens, causing decreased in aggregate demand for foreign trade in goods and services. This has caused a large decrease in demand in the Spanish tourism sector. Therefore, aggregate demand has decreased.

The reduced demand and supply in the economy has resulted in deflation. Additionally, the collapse of the oil prices globally has also resulted in deflation in the economy. The energy sector has experienced massive price drops. Though food prices are expected to increase due to the increasing production costs, the prices of most other commodities in the economy have decreased. The consumer price index (CPI) and the producer price index (PPI) both dropped as a result of the pandemic. As the economy battles to overcome the effects of the pandemic, further deflation could be underway and only after the economy has fully re-opened will there be some inflation. Supply shortages in most sectors in the economy are matched by demand decreases, preventing any increase in the inflation rate.

As Spain slowly starts to re-open its economy, there is still a lot of uncertainty. With low interest rates, decreased demand, and decreased supply, the price levels in the Spanish economy have fallen. The price levels have recorded a downward trend and only time will tell when the trend will be reversed.

Part 4

The COVID-19 pandemic has put most governments in the world in tough situations. It has led to citizens depending solely on their governments to help the economy recover from the adverse effects of the pandemic. The Spanish government has put in place numerous measures and policies aimed at containing the virus and its effects.

The Spanish government has implemented numerous measures to help contain the effects of the pandemic. The Spanish government announced a fiscal package worth 21 billion Euros as direct aids to its citizens (Domenichino, 2020). These direct aids were aimed at reducing the adverse effects of the pandemic on the citizens. A temporary monthly subsidy worth 440 Euros was provided for temporarily laid off employees (House, 2020). Additionally, the government provided unemployment benefits for employees who were temporarily laid off to help them meet their basic needs. Self- employed business owners were also catered for as the government allocated unemployment benefits for self-employed business owners who recorded a decrease in revenue by 75% and above. This allocation was to help these businesses get back on their feet after the effects of the pandemic.

The Spanish government announced a stimulus package worth 200 billion Euros in March 2020. The package was allocated to help business recovery and protect the vulnerable in the economy. In the same month, small-sized and medium-sized enterprises (SMEs) were granted tax deferrals for unto 6 months under the conditions that:

  1. a) These SMEs had a trade volume that does not exceed 6 million Euros.
  2. b) No interest penalties would be levied in the first three months of tax deferral.
  3. c) The tax amount should not exceed 30,000 Euros (Enache, 2020).

This measure was put in place to ease the recovery process of SMEs in the country after the pandemic. Additionally, the government also undertook to guarantee 80% of the loans amounting to 200 million Euros for SMEs and self-employed businesses. The loan guarantee was also extended to other enterprises with the government guarantying 70% for all fresh loans and 60% for loans being renewed. The Spanish government, in collaboration with the European Union, agreed on a 500 billion stimulus package to cushion citizens of EU against the negative impacts of the COVID-19 pandemic while a further 8.8 billion Euros was injected into the Spanish economy as response to the negative effects of the pandemic.

In summary, the government has put in place a lot of resources to help the economy recover from the crisis. It has put in place stimulus packages directed at helping the economy to recover. The efforts of the government have gone a long way in dealing with the current effects of the pandemic.

References

Amaro, S. (2020, April 16). Spain’s jobless rate is set to surge much more than in countries like Italy. CNBC. https://www.cnbc.com/2020/04/15/imf-coronavirus-to-create-more-unemployment-in-spain-than-italy.html

Analysis: Spain rises to coronavirus challenge. (2020, March 19). Home – Fruitnet.com. https://www.fruitnet.com/eurofruit/article/181212/analysis-spain-rises-to-coronavirus-challenge

Askew, K. (2020, March 16). Coronavirus: Europe calls for calm as food shortage fears spark panic buying. foodnavigator.com. https://www.foodnavigator.com/Article/2020/03/16/Coronavirus-Europe-calls-for-calm-as-food-shortage-fears-spark-panic-buying

Burgen, S. (2020, March 18). Coronavirus: Spain’s tourist industry braces for big losses at easter. the Guardian. https://www.theguardian.com/world/2020/mar/11/coronavirus-spains-tourist-industry-braces-for-big-losses-at-easter

Domenech, J. M. (2020, April 20). Economic measures to counteract the impact of COVID-19 in Spain. CaixaBank Research. https://www.caixabankresearch.com/en/economic-measures-counteract-impact-covid-19-spain

Economic activity has halved during Spain’s coronavirus lockdown, study suggests. (2020, April 15). University of Cambridge. https://www.cam.ac.uk/research/news/economic-activity-has-halved-during-spains-coronavirus-lockdown-study-suggests

Enache, C. (2020, March 27). Spain’s COVID-19 economic response. Tax Foundation. https://taxfoundation.org/spain-coronavirus-economic-response/

Forte, F. (2020, May 13). Spain: Coronavirus impact on stock market 2020. Statista. https://www.statista.com/statistics/1102926/coronavirus-impact-on-the-ibex-35-in-spain/

House, C. (2020, March 31). Spain unveils fresh economic relief measures for vulnerable groups. www.euractiv.com. https://www.euractiv.com/section/economy-jobs/news/spain-unveils-fresh-economic-relief-measures-for-vulnerable-groups/

Miguel Ángel García Vega. (2020, May 18). More unemployment and lower wages: Coronavirus crisis dimming the prospects of young people in Spain. EL PAÍS. https://english.elpais.com/economy_and_business/2020-05-18/more-unemployment-and-lower-wages-coronavirus-crisis-dimming-the-prospects-of-young-people-in-spain.html

Ministry of industry, trade and tourism – COVID-19 news. (n.d.). https://www.mincotur.gob.es/en-us/COVID-19/Paginas/COVID-19.aspx

Roldan, T., Pascual, A. G., & Rey, P. (2020, March 16). Coronavirus and Spanish economic policy: Impact and responses. Do Better | Esade Insights & Knowledge hub. https://dobetter.esade.edu/en/coronavirus-economic-impact

Spain: Coronavirus disrupts the historical peak of Spanish exports. (2020, April 23). Agroberichten Buitenland. https://www.agroberichtenbuitenland.nl/actueel/nieuws/2020/04/23/spain-coronavirus-disrupts-the-historical-peak-of-spanish-exports

Spain’s economy set to suffer most from coronavirus crisis. (2020, April 9). Financial Times. https://www.ft.com/content/396415a2-7778-4675-8bec-da8fca154bca

Spanish PM sees ‘slow and gradual’ end to lockdown. (2020, April 22). BBC News. https://www.bbc.com/news/world-europe-52380654