Model or Econimic Theory (Essay Sample)

Model or Economic Theory
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Model or Economic Theory
Nixon posted on the Wall Street Journal, which is the news article that has been analyzed in this paper on March 11, 2015. It indicates that before the current economic situation, Greek experienced a decade of exemplary economic growth in all its sectors before revelation of the underlying pitfalls of this economy in 2009. Greece economy has since 2010 experienced several historic series of economic throws with the new socialist government’s announcement of misinterpretation of the initial fiscal report. This led to a spontaneous reaction by the financial market; a reaction that saw spreads rose on Greek bonds (Nixon, 2015). Investments have been halted, banks emptied of several millions of money, and a rise in loan defaults.
It is impossible to predict exactly when the economy is likely to hit recovery since Athens has even refused to allow inspection of its financial books by the Euro officials. The government has made several failed attempts to bring back the fallen economy from recession by implementing measures such as the austerity and reforming of financial policy. Besides, Athens plans to get unconditional funding from the European Central Bank to bail Greek out of its debts and the applied austerity measures deepened the economic rift since the economy was already at its recession at the time of its introduction.
Initially, the government thought of getting a direct financial support from the European Central Bank, but later had their plans thwarted when the ECB mentioned that the European treaty does not permit it to finance governments. The government occasionally attempted to dissuade the ECB from their reform insistence and the government has currently been in the process of making and undoing deals as a reaction method of getting the required money.
The existing economic recession and the applied austerity measures have caused widespread poverty in this economy. The distribution of this poverty is greatly determined by individuals’ income levels, participation in the labor market, their status of employment, and their income levels. The national poverty level, however, has kept increasing with variation in different levels and regions. High - income families experience low levels of poverty as compared to low - income households that are headed by farmers or jobless individuals. The low - income families are the worst hit by the rising poverty level since their unpredicted income cannot keep up with the rising inflation. The burden brought by the austerity measures also has had far - reaching consequences on the deteriorating economy. This is because the implementation of these measures resulted to slashing of pays of public servants and pension benefits, which raised the amount that is spent on unemployment benefits and increase in value added tax rates.
The economic theory that has been applied in analyzing this article is the game theory. The game theory is a way of illustrating existing interaction between a pair or more players in a circumstance involving laid rules and outcomes (Colman, 2013). In industrial fundamental analysis, this theory is of great significance in understanding any interactions between two firms or even more.
This theory can be used to predict the outcome of a situation especially when the involved play outs are known or when the consequences are quantifiable. In this theory, there are assumptions on rationality and maximization. In examination of a set game, the assumption is that on behalf of a player, the listed payouts are inclusive of all the payoffs that are directly associated with the resultant outcome. The game theory uses different methods to predict the outcome of a situation, one of the games being the backward induction game. For instance, a diagrammatic illustration of this involves two players; player (pA) and two (pB) respectively.

Left Right

 Up Down Up Down

(A, C) (B,C) (D, B) (C, A)
This is an elementary sequential game involving two players. The labeled pA and pB boxes are information sets representing the first and the second player respectively. The letters at the bottom of the tree diagram are payoffs for each point. The first player A makes the first decision to either direction, right of to the left followed by player B (down or up) in that sequence. In backward induction, the second player B maximizes his payoffs. In this case, the choices for player B can be eliminated. Once this reduction is achieved, player A can then maximize its payoffs since player B’s choices are now identified the process that would result to an equilibrium. This theory can be used to solve situations that would otherwise prove to be confusing in normal life situations.
The game theory is a strategy that can be applied in solving the problem facing the Greece government. If Athens successfully forces the Euro zone to give Greece the cash it needs without any conditional basis, the known nature of the currency of this union shall have been changed and this would make it easier for it to access more and more Euros. The Greece government will then be able to pull out of recession at the expense of the European countries. When this happens, however, the Euro zone will be diversely affected since this will pull and bring the other member states to recession by saving Greek. However, the possibilities of this strategy working does not seem to appear any closer since the currency union between sovereign states cannot operate aside from the set laws that govern its operations. Even the deals that Athens is trying to make with the politicians may not work, since even the politicians, who for personal reasons, may want to break the rules while cutting deals for this one state, other member states, and agencies would have little or no room at all for stratagem.
Similarly, the other player, which is the international monetary fund that Greek has tried to solicit, funding from cannot dish out cash to Greece without a signed agreement. This is the only agency that is currently lending out money to Greece since no other Euro zone parliament can accept to lend money to Greek government. If the same situation continues, then Greece government remains at a risk of exiting the euro zone because of inability to sustain debts.
The resultant consequences of Greece as a player exiting the euro zone would spell dire consequences for both the remaining member states of the euro zone and Greek government itself. This risk is, however, not as much as that of ripping up the ruling or guiding principles of the law in an attempt to salvage Greece economy. Initially, exit of Greek posed a threat to several member state economies but since most of these states such as Spain, Portugal, and Ireland have attained economic recovery, the risk may not spill over to these states.
The exit of Greece seems to be the only ultimate solution for the existing problem for the Euro zone; the market does not mount any pressure on the zone to cut the existing deal. Instead, attempts are made to help solve the stalemate while it is still a member state. This is because leaving this nation to exit the union would make their condition worse like those of other member states such as Venezuela, which had earlier on exited. These risks associated with the Greek exit are what keep most of the Euro zone policy makers clinging to the wish that Athens may finally come to respect the set rules of the euro zone and let Greek stay in the existing currency union....