Hungary has undergonemajor macroeconomic and structural adjustment in its transition to a marketeconomy. Under extremely difficult economic and social circumstances, notablythe collapse of trade with the former east-block countries and the consequentinitial job losses, the Government has largely resisted protectionistpressures.But since 1989, Hungary has transformed itself into a marketeconomy. After this in 2004 it joined the European Union. Global financialcrises was hurt Hungary during the year 2009 and its economy was seriously weakenat that year. This was lasting till 2012. Finally, the trend has changed to thepositive side in 2013. Also, in 2015 the Hungarian economy was still showingpositive signs (such as positive GDP figures, decreasing unemployment,manageable state budget, etc.
), and a solid economic growth is expected by allthe major analysts.In my research I’m going to discuss the trade capabilities of Hungarywith the help of the Gravity Model and Comparative Advantage. Most of the dataI used in my research was taken from the www.
stats.oecd.org.In my further writing I’ll also give references to the other sites that Iworked with too.Let’sstart from the Gravity Model:Theeconomies of Eastern and Central Europe were influenced by the end of thecommunist regime which brought big changes. According to this, countries begunto rebuild their foreign trade.
GDPof Hungary was 1.5 after the evolution period and it opened its doors fortrade. So, in 2011 Hungary traded with more than 170 states. Inmy report I analyzed the trade relation between Hungary and other countrieswith the help of the Gravity model.
For the sample I’ve taken approximately 3countries which are Austria, Romania and Germany. The data that I used in myreport is related to exports, distance and GDP’s of trading countries. Based onmy researches, Austria, Germany and Romania were the countries which Hungaryhas the most strong trade relations (there were other countries too but I’vechosen top 3 of them).
All the required information is given in the table below. First, let’sstart from the formula of Gravity Model: (Data is takenfrom www.stats.oecd.org)Fij=G*Mi*Mj/Dij In this formula, Fij-is the quantityof trade between two countries, G- is gravitational constant,MiMj- is GDPs of countries and Dij-is distance between countries i and j. By the help of this formula we’re goingto calculate G.
The results that we got from this calculation are given in thetable below.Germany: 27.9= G*45.085/794.
56= Mi Mj (million) Dij (km) Fij (billion) G Hungary 13,134 – – – Germany 45,085 794,56 27,9 37,43 Romania 9,499 439,61 6,1 21,50 Austria 49,054 375,66 6 3,50 From the given information in the table it’s seen that among the 3countries Austria has the highest GDP.Also, the closest country to Hungary is also Austria. It’s obvious that when thecountries are in near distance it’s much easier for them to trade with eachother. The reasons for this are simple. For example, it’s simple to transportgoods to the other country because less transportation costs are required. Alsothey could have common market agreements or lower trade barriers. But these arenot the only factors that simplify the trade between the countries.
Forinstance, from the given table, we can see a good example of comparativeadvantage. As you see from the table, Germany is not on the first placeconsidering GDP and is the furthestcountry to Hungary but despite this the quantity of trade between it and Hungaryhigh. This could occur because of surplus resources and rich infrastructure in developedcountries.
So, in this example we see that in comparative advantage GDP andtransportation costs are not the factors that hold the quantity of trade on ahigh level.Let’s talk a little bit more about comparativeadvantage. The food and beverage industry is one of the mostimportant sectors of the Hungarian economy. It is the second-largest employerand the third-biggest producer in the manufacturing sector.
The sector´s value added growthis expected to increase 2.5% in 2017 The number ofworkers in food industry in 2011 was employed 124,000. (According to the information I gotfrom atradius.
de). Food export revenues are a significant contributor toHungary´s overall trade surplus. In the Central and Eastern Europe region the Hungaryis the only country that exports agricultural and food products. Let’sobserve the competitiveness of Hungarian agriculture which is related to EU.(This research belongs to European Union’s PHARE ACE program). We use revealedcomparative advantage (RCA) for our analysis with Hungarian–EU trade data forthe 1990s.
The RCA index was formulated by Balassa as: RCA = (Eij / Eit) / (Enj/ Ent). Here, x is exports, i is country and w is a set of countries. RCA1 isbased on export performance.
So it measures a country’s exports of a commodityrelative to its total exports and to the corresponding export performance of aset of countries.Takein attention that, If RCA1>1, then a comparative advantage is revealed.Let’sconsider Hungary’s trade in agriculture during the year 1992–1998. The sampleconsists of different products and covers mutual trade flows between Hungaryand the EU. (I took the data from www.stats.oecd.
org) Revealed comparative advantage if: RCA1 >1 RCA2 >0 RCA3 >0 RCA4 >0 RCA1 RCA2 RCA3 RCA4 Live animals 4,45 4,16 0,05 0,67 17 18 24 18 Meat and meat preparations 4,75 4,43 0,25 0,61 5 8 18 25 Dairy products and birds’ eggs 0,19 -0,07 -0,04 -0,54 46 -98 -77 -23 Fish, crustaceans, molluscs 0,11 -0,02 -0,01 -0,50 29 -130 0 -25 Cereals and cereal preparations 0,81 0,45 0,00 -0,03 50 103 – -921 Vegetables and fruits 2,20 1,84 0,07 0,23 15 18 13 14 Sugar, sugar preparations and honey 0,86 0,41 -0,01 -0,10 18 84 -283 -259 Coffee, tea, cocoa, spices 0,87 -0,11 -0,06 -0,57 29 -206 -15 -12 Miscellaneous edible products & preparations 0,29 -0,74 -0,09 -0,86 81 -33 -26 -6 Beverages 0,43 0,18 -0,02 -0,22 14 77 -73 -67 Tobacco and tobacco manufactures 0,10 -0,75 -0,02 -0,61 74 -25 -33 -41 Oil seeds and oleaginous Fruits 11,60 11,23 0,04 0,55 37 38 43 36 Cork and wood 3,33 2,36 0,04 0,36 16 24 18 17 Crude animal and vegetable Materials 2,12 1,38 -0,04 -0,23 13 17 -38 -40 Animal oils and fats 3,73 3,38 0,00 0,14 59 61 256 149 Note: Revealedcomparative advantages are shown in bold. If youremember earlier we said that when RCA1 is higher than 1 then the comparative advantageis revealed. So from the given graph we see that Hungary’s comparativeadvantages are live animals, meat, oil seeds, vegetables and fruits, cork andwood. During 1990’s regardless of important changes in Hungarian agriculture it’scomparative advantage has stayed almost the same.
This study shows that Hungaryhas a comparative advantage for live animals and meat, but not for cereals.This can be explained because of the use of different methods to define thenotion of competitiveness. These calculations are based on observed trade dataand attention has been given to the possible effect of government distortionsin the works of international markets.Current account and balance (EUR millions) 2011 2012 2013 2014 1.A. Goods and Services, net 6213 6836 7623 3576 Exports 87833 86424 89197 45776 Imports 81620 79588 81573 42200 1.A.a.
Goods, net 2925 3038 3586 1549 Exports 71793 70299 72409 37600 Imports 68868 67261 68822 36051 1.A.b.
Services, net 3288 3798 4037 2027 Exports 16039 16125 16788 8176 Imports 12752 12327 12751 6149 1.B. Primary income, net -4892 -4160 -2907 -1293 1.
B.1.Compensation of employees, net 981 1648 2168 1068 1.B.
2.Investment income, net -7170 -7097 -6485 -3033 1.B.2.1.
Direct investment income, net -4714 -4408 -3921 -1688 1.B.2.2.Portfolio investment income, net -1962 -2274 -2387 -1279 1.B.2.3.
Other investment income, net -1366 -1207 -826 -359 1.B.2.4.
Reserve assets, net 872 793 648 293 1.B.3.
Other primary income, net 1297 1288 1410 672 1.C.Secondary income, net -567 -802 -554 -407 -of which: EU transfers -26 105 417 119 Current account, net (1.
A+1.B+1.C) 754 1874 4162 1876 Data was taken from: www.english.mnb.hu.comAs it is seenfrom the table there is current account surplus that means Hungary is a largeexporter and has a positive trade balance. Monetary and fiscal policy The country’smonetary policy is controlled by The Hungarian National Bank which is thecentral bank of Hungary.
Its primary objective is to achieve and maintain thestability of price. This means low but positive inflation rate. This aim isconsistent with the European and international practice. The inflation level isaround 2-2.5% according to international observations when the purpose ofEuropean Central Banks is to achieve inflation rate close to 2 % over themedium term (www.english.
mnb.hu.com). Hungary usesthe floating exchange rate system since 26 February 2008, so Hungarian forintis fluctuating in accordance with the effects of the market in the face of thereference currency, the euro.In Hungarytaxes are levied both by federal and local governments. Tax revenue in Hungary equals to 39.3% ofGDP. The tax system consists of central and local taxes that include a personalincome tax, a corporate income tax, social security and a value added tax.
Theratio of local taxes is 5% compared to EU that is 30% among total tax income.(Mihály H?gye. “Reflection on the Hungarian Tax System and ReformSteps” 2010)
