The Israeli Economy

Topics: Inflation, Monetary policy, Macroeconomics Pages: 9 (2860 words) Published: February 27, 2013
Table of Contents

Israel’s GDP4
Financial Crisis5
Interest Rates5
Budget Deficit…………………………………………………………………………………………………………………………………………….. 7
Unemployment in Israel8
Inflation in Israel9
Balance of payment10


Israel was under British mandate untill May 14, 1948 when it declared its independence. The Israeli economy is highly diversified open-economy that depends on imports of raw materials, crude oil, gains and military supplies. In spite of having very limited natural resources, Israel has a highly developed agriculture and industrial sector. The Israeli economy mostly relies on exports (45% of its GDP) and services such as high technology equipment, agricultural products (vegetables and fruits) and cutting diamonds. United States Is considered to be a very important partner for Israel, since it omy mostly relies on exports ( States . , in fact almost half of the government'steady growth allow the economy to come backis getting most of its military and economic help from the U.S, in fact almost half of the government external debt is owed to United States.

In the following report we would analyze Israel’s current macroeconomic position, mainly focusing on its GDP and its performance during the recession

Israel’s GDP

GDP – “The total market value of all final goods and services produced in a country in a given year” (Investorwords, 2010).
The way to form the GDP formula would be as follows:
GDP is a sum of Consumption (C) , Investment (I) , Government spending (G) and Net exports (X-M) [ Y = C + I + G + (X – M) ] .

Source: Bank of Israel
Source: Bank of Israel
In the beginning of past decade economists in Israel were very optimistic about Israel’s economy after having a rapid growth rate of 9.1% in 2000. Unfortunately, there has been a serious set-back in the economy during the following two years due to a decrease growth in the U.S furthermore downturn in investments by U.S firms in Israel and consequently a decrease in demands for Israeli exports (Finance Department, 2003).

Another reason was the Israeli-Palestinian conflict also known as ‘the second intifada’ combined with a down turn in the high-tech sector (dot-com bubble) (CIA - The World Factbook ,2011 A) . These factors caused a massive slowdown in the economy over the years of 2001 and 2002 influencing on the private consumption which was negative for the first time since the 1980’s and also caused GDP to have negative values -0.1 and -0.6 respectively.

In 2003, Israel started paving its way towards economic growth followed by 5 years of above trend GDP growth with an average of 5.04% per year.

Financial Crisis
While the effects of the global financial crises in 2008 began to flow through world economies, Israel was well prepared and put itself in a strong position. The budget deficit and national debt had been largely reined in with a great help of increasing taxes and aggressive spending cuts. Another factor was Israel’s conservative banking sector which kept its banks from looking for ‘promising business opportunities’ which were later recognized as catastrophes in U.S. and Great Britain (Ministry Of Finance , 2010 A). Although Israel was considered not to be highly affected by global crisis, yet it was still battered and fought back by implanting a modest fiscal stimulus package and an aggressive monetary policy. * The pension funds which were tied to mortgages bonds and stocks have lost one-fifth to one-third of their values as the global crisis hit Israel’s economy (Richard Boudreaux , 2008). This has brought the government to subside the private pension funds that had got into actuarial balance crisis, increase retirement ages of both women and men by 2 years. Interest Rates

* A sharp decrease in interest rate is a clear example of aggressive monetary...
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