1.1 Economics
- Study of choices made by individuals, firms, governments and the society as a whole.
- We would be studying Germany’s economy in terms of its aggregated indicators such as GDP, Unemployment and Inflation, and how the government takes measures to ensure that the economy is running at close to or at its full potential.

1.2 Germany's Economy
- World’s fourth largest economy in the world and has the largest economy in Europe in terms of nominal GDP.
- Germany is also the third largest exporter of goods and services in the world.
- History on its operation within a “social market economy”  - whereby it is based on a free market operated in conjunction with social welfare systems for the underprivileged.
- History of its previous economic system - Marxist socialist country during Hitler’s rule before World War Two, the Nazi experience had influenced its shift in economic ideology from the Nazi rule of state intervention and domination to a “free market.” However, it also focuses on “social” as West Germans wanted an economy that would not only help the wealthy but also care for the workers and citizens welfare who are not so better-off. Hence, the contradiction between the “social” and “market” is debatable, but it tries to combine the virtues of both sides that gives rise to its present economy.

1.3 Political and Social Happenings
- Brexit referendum had turned out not what to be expected by analysts, and with Britain leaving the European Union, it could reduce German GDP growth by as much as 0.5% in 2017, with GDP growth losing 0.1% this year as a result of the referendum.
-  Trump’s protectionism policies are turning U.S. inwards, - as one of the world’s largest trading partners becomes an isolationist and protectionist.
- In Germany, the German federal elections are slated to take place in either September or October of 2017. Even though the current Chancellor Angela Merkel is set to run for her fourth term, there are certain political uncertainties that could turn the election into what wasn’t expected like the previous two events stated. She faces criticism for her refugee policy - the vast majority of refugees from Syria and Iraq.  Voters are leaning towards the nationalist, anti-immigrant Alternative for Germany (AfD) party.

Germany has a investment and export centred growth model where it is considered to be partly responsible for the slow growth in the EU. Gross fixed capital formation (investments) has declined over the years and has been around 19% currently in Year 2015, but it took up over 25% of Germany’s GDP in the early 1970s. Exports now has become the bulk of Germany’s economy as its share of exports rose from 20% in the 1970s to 47% currently in Year 2015.

2.1 Components of Germany’s GDP
- Bulk of Germany’s GDP comes from services (69%) with its industries GDP taking up 31% (26+5) of its overall GDP. The rapid industrialisation of Germany in its history days during the early 20th century has brought Germany to become Europe's most industrialised nation today, boasting major players in industries like automobile, manufacturing, technology, which are also Germany’s most important export items. Germany also ranked first in skill-intensive services like technical services, IT-services and financial services. Despite Germany’s forte as an industrialised nation, services took the main bulk of the country’s GDP. Interestingly, Germany’s agricultural sector takes up only up to 1% of the country’s GDP, but it is still ranked third in agricultural production in the European Union, and the nation is able to provide 90 percent of the country’s population food demands.

2.2 Approaches in calculating GDP
- Figure 2 - Various approaches of calculating GDP
- Figure 3 - Basic circular flow of income diagram, Hence Aggregate Income = Aggregate Expenditure

2.3 Quarter 3 2016 (quarter-on-quarter) comparison

2.3.1 Expenditure Approach
- Germany’s GDP for 2016 Q3 only grew by 0.2% quarter-on-quarter, down from Q2’s already slow 0.4%, and the lowest since Q1 2015. This economic slowdown is due to a deteriorating external sector as resumption of private capital outflows begins due to the reduced euro area financial stress.
- Both household consumption (+0.4%) and government consumption (+1.0%) rose, with a combined increase of 0.6%.
- Gross fixed capital formation (GFCF) or investment by firms stagnated in Q3 2016, with GFCF rising 0.3% but GFCF in machinery and equipment dipping by 0.6%.
- Exports decreased by 0.4% in Q3 following a 1.2% growth in Q2. This could be due to the Brexit referendum in June. Imports grew by 0.2% in Q3, which was higher than that in Q2. Net exports dropped (-0.2%), and had a downward effect on GDP growth.
- The above analysis from the table and various components namely personal consumption, investment by firms (GFCF), government spending and net exports used the expenditure approach to calculate GDP of Germany whereby
Aggregate Expenditure = Consumption + Investment + Government + (Exports - Imports).

2.3.2 Income Approach
- The overall gross national income of Germany increased by 2.6% in Q3 2016. Net national income (factor costs) includes, rental income (land), compensation for employees (labour), interest income (capital) and entrepreneurship (profits). Net national income rose by 2.6% overall for Q3 2016 compared to the previous year’s Q3. 
- Further Explanation about Indirect business taxes and depreciation, before concluding that Aggregate Income = Compensation of employees + Profits of entrepreneurs + Rental income + Net Interest + Indirect business taxes + Depreciation.

It is an important macroeconomic indicator as economies try to reach a full employment equilibrium, where the economy is using all its existing resources to produce at its potential GDP.

3.1 Background of Germany’s Employment Data
- As of currently in October 2016, 43.37 million persons who reside in Germany were in the labour force, 41.64 million employed, and with 1.73 million unemployed. Based on the overall graph shown above, the persons in employment and economically active population have relatively been climbing for the past decade. The number of unemployed persons has also declined over the last 10 years, to one of its lowest levels at 4.1% in Oct 2016.
- Correspondingly to GDP, the distribution of the labour force is as follows, 1.6% in agriculture, 24.6% in industries and 73.8% in services. These labour force figures roughly correspond to the proportion each sector takes up in producing goods and services (GDP).

3.2 Germany’s current unemployment situation (October 2016)
- Comparing Germany’s unemployment rate in October 2016 with the previous month (September 2016) and the same month of the previous year (October 2015), the unemployment rate of Germany has decreased to now at 4.1%, one of its lowest levels.
- Government expects the unemployment rate to drop even further in the near future, as advertised job vacancies have always been setting records. In November, 681,000 jobs job vacancies were reported, 71,000 more than a year ago. 
- Germany already taking in close to a million migrants this year and last year, the government is tapping on this unskilled labour force by putting in another €3.8 billion to help the migrants get jobs. 
- Hence, Germany’s workforce would increase in time to come, with its unemployment rate decreasing. 

In every economy, the objective of macroeconomic policy is to ensure price stability, where the average price level is neither moving up nor down. Price stability is key to achieving high levels of output (GDP) and employment.

4.1 Germany’s Price Indicators
- There are two consumer inflation figures reported, one is the consumer price index (CPI) and the other is the harmonised consumer price index (HICP).
- CPI measures the price changes in a fixed basket of consumption goods and services commonly purchased by the resident households over time in the country itself, but the HICP is also a price index but for comparison of price levels between European countries in the European Union.

4.2 Germany’s Inflation for October 2016 (month-on-month) comparison
- Germany’s inflation rate in October 2016 has increased by 0.8% with comparison to the same month in 2015. 
- The decline in energy prices (approx. 10.7% of CPI basket) of -1.4% in October 2016 as compared to October 2015 had a reduced effect on the overall CPI rise. Food prices (approx. 9.1% of CPI basket) remained unchanged. The bulk of the remaining 80.1% of CPI basket contributed to the 0.8% rise in overall prices.
- The International Monetary Fund predicts that inflation in Germany will continue rising in the coming years. Hence, inflation must be anticipated by people particpating in the economy to protect their purchasing power – so that their income can be adjusted to match the inflation rate.

With the current slow economic growth in Germany, the German government has to act upon the challenges to stimulate economic growth in a bid to mitigate the impact of an economic downturn. Germany would need to pursue an expansionary fiscal policy in order to boost the economy, by altering aggregate demand and impact the nation’s output, employment and price level by the means of adjusting government spending and/or taxes.
 
Government spending and taxes when used correctly, can strengthen the aggregate demand in an economy and therefore, real GDP. Germany can increase government spending and/or decrease taxes to boost economy.

5.1 Government Spending
- As more monetary capital is injected in the economy by the government, firms need to produce more goods and services to meet the increased demand. To produce more goods and services, they employ more factors of production from households. Monetary income spent by the government flows to firms, which in turn flows into households. Real income of households and firms increase. The spending multiplier then takes effect, where initial spending by the government multiples, which then forms the Real GDP. Therefore, an increase in government spending will lead to increase in consumption, increasing the real GDP in an economy.
- As Germany now faces slow economic growth, it is necessary for government to spend more monetary capital to stimulate economic growth and stability. As reported in the chart, government spending increased from July 2016 (€136.99 billion) to October 2016 (€138.84 billion) by a larger margin than the rest of the quarters.  The government spent more in a bid to stabilise the economy after a referendum whereby British citizens voted to leave the European Union (EU) on 23 June 2016.
- From the Germany government spending forecast chart above (line in blue), it is reported that the government is expected to spend more, reaching about €141 billion in January 2017.  Germany is expected to spend more in times to come, stabilising the economy and mitigate the negative impact of Trump’s economic protectionism policy on Germany.

5.2 Taxes
- Germany can reduce tax rates to increase the real income of taxpayers, therefore raising consumption function level as well as the real GDP level. Tax cuts may provide consumers and firms with an incentive investments to stimulate economic activity and growth. However, decreasing taxes would also mean lesser tax revenue for the government. 
- Since 2007, the income tax rate has been at a consistent rate of 47.5% even after the Global Financial Crisis in 2008. Germany would hence unlikely to adjust the income tax rates of the citizens. 
- Since the Global Financial Crisis, Germany has kept its corporate tax rate to a lower level from 38.4% to at about 29.6%. As taxes are the main source of income for Germany, tax rates is unlikely to decrease in order to maintain the government’s revenue level.