MACROECONOMIC INSIGHTS FOR

FINLAND

Shrimoyee Mukherjee
Nikshep TA
Tanisha Dey
Rijupalika Dey
 MACROECONOMIC INSIGHTS FOR FINLAND

Abstract

Finland has been designated the happiest country in the world for four consecutive years by the
United Nations Sustainable Development Solutions Network. Therefore we have decided to analyze
the country, which is not the wealthiest country in the world. Still, it has been able to demonstrate a
steady increase in the GDP, production, and all the parameters of the economy. It has also been able
to keep inflation under check and a low level of unemployment which are necessary to keep a country
happy. We have also incorporated the fact that Finland entered the OECD in 1969. After which, it has
been able to keep a check on its various development parameters.

Introduction
Macroeconomics is the branch of economics that deals with the structure, performance,
behavior, and decision-making of the whole, or aggregate, economy. Macroeconomics
studies economy-wide phenomena such as inflation, price levels, economic growth rate,
national income, gross domestic product (GDP), and changes in unemployment. The two
main areas of macroeconomic research are long-term economic growth and shorter-term
business cycles. A macroeconomic factor is a pattern, characteristic, or condition that
emanates from, or relates to, a more significant aspect of an economy rather than to a
particular population. The characteristic may be a significant economic, environmental, or
geopolitical event that widely influences a regional or national economy.

The economy of Finland is a highly industrialized economy, with services being the most
significant sector. Concerning foreign trade, Finland's key economic sector is manufacturing.
The largest industries contributing to manufacturing are electronics, machinery, vehicles,
other engineered metal products, forestry, and chemicals. Forestry paper factories and the
agricultural sector operate solely in rural areas. Finland joined the OECD in 1969. The period
taken into consideration is 1961 to 2019 to solely focus on the development of Finland after
entering OECD.

The changes in the economy of Finland

The GDP growth of Finland has been positive but continuously fluctuating since the 1960s.
However, there had been two instances of sharp dips in the GDP growth. The negative
growth of GDP during the 1990s is due to the massive economic boom of the 1980s, causing
corrective contraction. As a result, the economy plunged into a depression during the 1990s.
The economic reforms of the 1980s led to a robust economic boom in the country. The
negative GDP growth during the 1990s was a corrective contraction leading to depreciation.
The Finnish banking laws of 1986 allowed the companies to borrow more easily from the
foreign banks as they were less expensive than domestic banks. However, the currency
devaluation that occurred in November 1991 increased the debts of the Finnish companies
holding loans in foreign banks in foreign currencies. The downfall of the Soviet Union gave a
blow to the Finnish trade. The Finnish foreign market just disappeared overnight. As a result
of all these consequences, consumption and investment decreased, the GDP decreased, and
GDP growth also decreased. The sharp dip in 2009 is due to the Economic crisis of 2007 –
2008. The entire world economy collapsed, production was halted, and the GDP declined.

Net national income

Net national income is defined as gross domestic product plus net receipts of wages, salaries,
and property income from abroad, minus the depreciation of fixed capital assets through wear
and tear and obsolescence. Only the finished or final goods are considered as factoring
intermediate goods used for manufacturing would amount to double counting. It includes
taxes but does not include subsidies. When depreciation is deducted from the GNP, we get
Net National Income.
 Net National Income in Billion(current US$)
250.00

200.00

150.00

Net National Income in

Billion(current US$)

100.00

50.00

0.00
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20
Net National Income in Finland over the period 1970-2018
Source: World Bank
Since 1970 the national income of Finland is noticed to be growing from 9.85B $ in 1970 to
44.27B $ in 1980, between 1980 and 1985, we can observe a constant phase where the Net
National Income is observed to be between 44-45B $, after 1985 a rapid growth is observed
where the Net National Income rose to 111.21B $ in 1990. A deep systematic crisis of
Finland's financial sector occurred mainly during 1991-1993, which resulted in the downfall
of Net National Income till 1994 after the 1994 recovery phase is observed after the 1990
financial crisis. Since 2000 a rapid growth in Net National income has been observed till
2008. In 2008 Finland saw one more financial crisis, which resulted in a downfall of Net
National income; recovery stage is observed after 2008 with rapid fluctuations in the graph,
in 2019 Finland Net National Income is observed to be 219.83B $.

Gross domestic product

GDP is the measure of the total market value of a country's output. It is the market value of
all the final goods and services produced within a given period by factors of production
located within a country. It includes consumption, household, government expenditures, and
net export as its key components.

Total GDP of Finland from the period 1961-2019

Source: World Bank

Per capita GDP

The per capita GDP is calculated by dividing the country's total GDP by the population of
that country. The formula for per capita GDP is given as follows.
Per capita GDP = Total GDP / Population

Finland was geographically distant from Western and Central Europe. It had very few
provisions of industrialization at the beginning. Since the 1930s, it had been an agrarian
economy. However, even during the 1950s, the majority of the population was engaged in the
primary sector. However, after World War II, the industrial output surpassed all previous
years, and Finland became a manufacturing country.

Per- capita GDP of Finland over the period 1961-2019

Source: World Bank

The per capita GDP during the 1960s was entirely due to the output from the agricultural
sector, and hence it was low. In the post-Second World war period, the country transformed
from an agricultural economy to an industrial economy. This transformation was due to the
compensations of war, mainly in manufacturing goods. The GDP of Finland has been
growing steadily over time owing to the manufacturing sector. At present, the per capita GDP
of Finland is very high. Owing to foreign trade, the economic sector of Finland is
manufacturing. The largest industries are electronics, machinery, vehicles, metal products,
forestry, and chemicals.

GDP growth
The GDP growth measures the year-on-year change in the market value of all the final goods
and services produced in an economy over a given period. The GDP growth rate is measured
using the formula given below.

GDP Growth Rate = [(GDP of Year 2 – GDP of Year 1) / GDP of Year 1] * 100

GDP growth in Finland over the period 1961-2019

Source: World Bank

There has been a gradual increase in national income from 1970 to 1986. The Finnish
banking law introduced in 1986 allowed the companies to borrow more easily from the
foreign banks as they were less expensive than the domestic banks. However, the currency
devaluation in 1991 increased the debts of the Finnish companies holding loans in foreign
banks in foreign currencies. The downfall of the Soviet Union gave a blow to the Finnish
trade. The Finnish foreign market just disappeared overnight. As a result of these
consequences, consumption and investment decrease, the GDP decreases, resulting in a
decrease in the national income. From the early 1990s to the mid-1990s, the economy
recovered and gradually increased until 2007. The economy got hit by the financial crisis of
2008 that resulted in a decline in national income. Finland was not able to recover entirely
from the financial crisis, and therefore there was a recession from 2012 to 2014.

Inflation
Inflation is a progressive increase in the average cost of goods and services in the economy
over time. The inflation rate is an essential determinant of an economy's health conditions. It
reflects the fall in the actual value of goods and services, paired with the rise in price levels.
As Finland is a part of the Eurozone, it follows the monetary policy as stated by the European
Central Bank. The inflation threshold of 2% approximately is expected to keep the price
levels stable over the medium term.

C PI ∈present year −CPI ∈t h e previous year

Inflation Rate =
CPI ∈t h e previous year

An inflation rate of Finland over the period 1961-2019

Inflation rate
20.00
15.00
10.00
5.00
0.00
-5.00 61 64 67 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18
1 9 1 9 1 9 19 1 9 19 19 1 9 19 19 1 9 19 19 2 0 20 20 20 20 20 20

Inflation rate
Source: World Bank

From the above figure, the inflation rate for Finland was at its peak in 1976 at 17.81%. Prior
to this, there were two peaks in 1965 and 1969 respectively. The inflation in 1975 was
16.94%, which is near to the value of 1976. The lowest inflation rate was recorded in the year
2016, with a value of -0.21. The rate was also 0 in the year 2010. It can also be seen that the
rate has been low in recent years. It is seen that the fluctuations in the inflation rates have
been immense before the currency was floated in 1992. Since then, the rates gradually
stabilized over time even as the country entered the Eurozone.

One of the primary reasons for high rates of inflation till the early years of 1990 is that partial
price regulation was torn down. Interest rates were also deregulated for a few years. There
was also no regulation over the exchange rate of the Finnish currency (then, markka) which
led it to continuously depreciate over the years till it was finally floated in 1992. Post this,
price stability was established because of the inflation target set by the bank of Finland at 2%.
However, again as the 2008 financial crisis hit the world economies, Finland also faced the
consequences as the inflation rate declined to zero in 2010 for a certain period.

The supply shock of oil in 2015 supported the economy of Finland. As an oil-importing
country under the Eurozone, it reaped the benefits and, as a process experienced income
transfer into the hands of the people. Apart from this, the food prices had also fallen to
contribute to the fall in inflation. Also, due to the crisis in the 2008-10 period had long-term
after-effects on the economy as it experienced a negative output gap.

Unemployment
The unemployment rate reflects the inability of an economy to generate employment for
those persons who want to work but are not doing so, even though they are available for
employment and actively seeking work. (Unemployment rate, ILO)

No . of unemployed people
Unemployment rate= × 100 %
total Laborforce

The unemployment rate was the highest at 16.60% in 1994. It slowly declined over the years
and stabilized gradually. The lowest unemployment rate was recorded for the year 1961
(1.10%), and it remained low over the next few years until it started increasing from 1990.

Unemployment Rates
20.00
15.00
10.00
5.00
0.00
61 64 67 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18
1 9 1 9 1 9 19 1 9 19 19 1 9 19 19 1 9 19 19 2 0 20 20 20 20 20 20

Unemployment Rates
Source: European Central Bank

In the period considered from 1961, there was continuous development of industries, with the
prime industry being the wood processing industry. Also given the good relationship of this
country with the former soviet union, engineering industries also took shape and contributed to
low rates of unemployment. However, as a result of the recession, unemployment rate spurted
since 1991 and continued to be at higher rates as compared to the pre-recessionary period. Even
after joining the Eurozone the problem of relatively high unemployment still exists. One reason
for this can be the existence of trade unions that are supportive of the unemployed labor force of
the country. They are given unemployment doles and insurance and even legal protection.

Relationship of unemployment and inflation

Relationship of unemployment and inflation in Finland over the period 1961-2019
It can be seen that with a decrease in inflation rates, the unemployment rates have increased
over the period.

Cost Price Index

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices
of a basket of consumer goods and services such as transportation, food, and medical care. It
is calculated by taking price changes for each item in the predetermined basket of goods and
averaging them. Changes in CPI are used to assess price changes associated with the cost of
living. The CPI of Finland is positively sloping upwards.

Source: Statistics Finland

Long term interest rates

 Long term interest rates
14
12
10
8
6 Long term interest rates
4
2
0
-2 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0
8 9 9 9 9 9 0 0 0 0 0 1 1 1 1 1 2
19 19 19 19 19 19 20 20 20 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 0
Long term interest rates in Finland over the period 1988-2020
Source: OECD data

During 1988, the interest rate of Finland was high to encourage the Finnish companies to borrow
from foreign banks. Finland was plunged into depression during the 1990s. in the recovery period,
the Finnish banks decreased their interest rate in order to encourage domestic credit. Finland
being the happiest country, allows its people to take loans at meager rates of interest so as to help
people to prosper. The very low rates of interest of Finland makes it attractive for the foreign
countries to invest their money which adds to finland's development.

Foreign direct investment

Foreign Direct Investment (FDI) is a type of investment in to an enterprise in a country by

another enterprise located in another country by buying a company in the target country or by
expanding operations of an existing business in that country. FDI has been associated with
improved economic growth and development in the host countries, which has led to the
emergence of global competition to attract FDI. FDI offers several benefits like overture of
new technology, innovative products, and extension of new markets, opportunities of
employment and introduction of new skills etc., which reflect in the growth of income of any
nation. Foreign Direct investment acts as a bridge to fulfill the gap between investment and
saving. In the process of economic development foreign capital helps to cover the domestic
saving constraint and provide access to the superior technology that promote efficiency and
productivity of the existing production capacity and generate new production opportunity.

FDI inflows in Finland over the period 1960-2018

 FDI Inflows in Millions ($)
35000
30000
25000
20000
15000 FDI Inflows in Millions ($)

10000
5000
0
-5000

Source: World Bank

FDI outflows in Finland over the period 1960-2018

FDI Outflows in Millions ($)

40000
35000
30000
25000
20000 FDI Outflows
15000
10000
5000
0
-500060 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14 17
19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20

Source: World Bank

From the graph it can be seen that the FDI in Finland really only started in the late 1980s or
early 1990s. until 1990s, FDI inflows as a % of GDF in Finland was well below the world
average. As the interest rates started decreasing since 1990, the FDI inflow started increasing
gradually which helped Finland catching up with the rest of the world. After the second world
war, most of the economy shifted to the manufacturing sectors from the agricultural sectors.
Being a medium technology sector and with the development, the manufacturing sectors
attracted much more FDI in the late years of the period. The FDI outflows were much higher
than the FDI inflows in the 1980s. there was a gradual increase in FDI outflows till 2008.
Post to that period, both FDI inflows and outflows sharply declined due to the 2008 financial
crisis.

Foreign portfolio investment

FPI in Finland over the period 1975-2019
 FPI in Billions($)
2

1 FPI in Billions($)

-1

-2

-3

-4

Source: World Bank

From 1975 to 1995 more of FPI outflow is observed and after 1995, there is a gradual
increase in FPI inflows, which reaches its peak in 2010. A sharp decrease in FPI inflow is
observed post 2008 financial crisis. Post 2013 a gradual increase of FPI inflows is observed.

Government expenditure and tax revenue

The government expenditure represents the expenditures by the federal, state and local
governments for final goods and services. Taxes are the revenues collected by the
government for carrying out its expenditure. Taxes can be of various types like income tax,
sales tax and excise duties.

Government Expenditure in Finland over the period 1972-2017

Government Expenditure
40
30
20 Government Expenditure
10
0
72
75
78
81
84
87
90
93
96
99
02
05
08
11
14
17
19
19

19
19

20
20
20
19

19
19
19

19
19
20

20
20

Source: World Inequality Database

Tax revenue of Finland Over the period 1972-2018
Source: World Inequality Database

Net lending / net borrowing

Net lending or net borrowing in Finland over the period 1972-2018

Net Lending
8
6
4
2
0 Net Lending
-272 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
1-4 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20
9
-6
-8
-10
-12
Source: World Inequality Database

Central government debt

Central government debt is the total amount of debt owed at a point in time by
a government or sovereign state to lenders. Government debt can be owed to lenders within
the country (also described as internal debt) or owed to foreign lenders (external debt).
Government debt contrasts to the annual government budget deficit, which is a flow
variable that equals the difference between government receipts and spending in a single
year. Government debt represents the accumulation of all prior deficits.

Central government debt in Finland over the period 1961-2019

 Central Government Debt(Percent of GDP)
60

50

40

30
Central Government
Debt(Percent of GDP)
20

10

0
61 64 67 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18
19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20
Source: World Inequality Database

The government expenditure is high but it is constant over the years. Education is free for all
both at the school level as well as in the university level. Finland also has the provision for
universal healthcare for all. The government has to provide for these facilities for the Finnish
people therefore the government expenditure is high. The tax revenue of the government is
also high but constant over the years. It is high because the government needs revenue in
order to provide for these provisions to the people. The government keeps the tax revenue
and the government revenue constant because the increased government expenditure would
result in increased tax revenue from the country's citizens. Finland being the happiest
country, the Finnish government cannot afford to have fluctuating government expenditure
and tax revenue. The net lending has been positive in Finland over the years. During the
period of recession from 1991 to 1993, the net lending has been negative because the Finnish
government has been forced to borrow from the foreign countries in order to help Finland
recover. Government debt was low and more or less constant during the period from 1961 to
the 1980s due to the fact that the government expenditure was low. The period of recession
from the 1990s caused the government debt to increase sharply. The 2007 - 2008 Economic
Crisis led to a sharp fall in the government debt because the economy was in recession and
the GDP was low and as a result the government expenditure was also low. The period from
2008 to 2019 was borrowing by the government to help recover the economy.

Balance of trade
The trade balance is the difference between exports and imports of goods and services
(OECD). It forms the main part of the current account balances of the balance of payments.
 Balance of Trade=Exports−Imports

Balance of trade in Finland over the period 1961-2019

Balance of Trade
14000.00
12000.00
10000.00
8000.00
6000.00
4000.00
2000.00
0.00
-2000.00
61
64
67
70
73
76
79
82
85
88
91
94
97
00
03
06
09
12
15
18
19
19
19
19
19
20
20
20
20
20
20
20
19
19
19
19
19
19
19
19
-4000.00
-6000.00

Balance of Trade

Source: Country economy

The trade balance started to rise from 1989 and reached its peak in 2000 with a value of
11659.60. In the years that followed, the balance slowly started to decline and finally reached
its lowest in the year 2011 at -5121.90.

Current account to GDP ratio

The current account consists of all transactions of a country with the rest of the world which
include trade of goods and services, investment expenditures and unilateral transfer
payments. While income generated from the sale of commodities to other nations and foreign
investment returns are considered to be credit transactions, purchase of foreign goods,
investments by foreigners, and transfer payments are considered to be debit transactions.

Current ac c ount balance =Trade Balance+ Investment Income+Transfer Payments

Current account balance in Finland over the period 1961-2019

 Current account balance (% of GDP)
15

10
5
0
19 1
19 3
19 5
19 7
19 9
19 1
19 3
19 5
19 7
19 9
19 1
19 3
19 5
19 7
19 9
19 1
19 3
19 5
19 7
20 9
20 1
20 3
20 5
20 7
20 9
20 1
20 3
20 5
20 7
19
6
6
6
6
6
7
7
7
7
7
8
8
8
8
8
9
9
9
9
9
0
0
0
0
0
1
1
1
1
-5
19

-10

Current account balance (% of GDP)

Source: World Bank

The current account balance was the highest 9.335 in 2001. In 2000 and 2002, the values
were nearer to the highest value. The lowest balance was -7.26 in the year 1975. It can also
be seen that the balances have been negative for most of the years.

Trade balance was zero during the period from 1961 to 1969. Finland entered the OECD in
1969 and as a result it started importing goods from other countries. The trade balance was
fluctuating around zero during the 1970s and the 1980s. However, in 1991, the trade balance
increased. The exports were much higher than the imports. During the Financial crisis of
2007 – 2008, the net exports declined and it became negative in 2011. The period from 2011
to 2019 showed the trade balance fluctuating around zero. The current account balance is the
record of a country's international transactions with the rest of the world. The current account
includes all the transactions that involve economic values and occur between residents and
non-residents of a country. The period from 1977 to 1986 showed a positive current account
balance because the Finnish interest rate was high and the Finnish people were investing in
the Finnish banks. The period from 1986 to 1990 showed a negative current account balance
because all the Finnish people were investing in the foreign banks. The high current account
during the 1993 to 2011 is due to the fact that the balance of trade was positive and high.
However, as the balance of trade declined during the 2007 – 2008 Economic Crisis, the
current account balance also declined. The period from 2011 to 2019 current account balance
showed a similar trend like balance of trade.

Macroeconomic credit rating

The credit ratings of Finland are of two types: Solicited Credit ratings and Unsolicited Credit
Ratings. Various credit rating agencies have done the credit ratings for Central Government
debt for Finland. The Solicited Credit Ratings have been rated by Fitch ratings and S & P
global ratings. Both of these agencies have rated the credit system of Finland with the highest
grade in the short term. The ratings given by Fitch ratings and S & P Global ratings imply a
strong capacity to meet its financial commitments. In the long term credit rating, these two
agencies have awarded the second-highest grade. The Unsolicited Credit Ratings have been
awarded by agencies like CreditReform Rating, DBRS Morningstar, Japan Credit Rating
agency and Scope Rating. All these agencies have granted Finland the second-highest grade,
with a stable outlook, in the long run except the Japan Credit Rating Agency, which has
honoured Finland with the highest credit rating in the long run. DBRS Morningstar has
provided the highest credit rating under Commercial Paper and Short-term Debt Rating Scale.
Similarly, Scope Ratings has granted Finland the credit rating, which implies a high
capability to repay short–term loans with very low credit risk. Therefore, Finland has quite a
positive level of credit rating both for the short term and the long term

Income Inequality
Income inequality is used to measure how unevenly income is distributed across a population.
The higher the income inequality, the more unequal the country is based on income. The Gini
coefficient measures the inequality of the country. A Gini index of 0 implies perfect equality,
and a Gini Index of 1 implies perfect inequality. The graph showing the measure of the Gini
coefficient is shown below.

Since the income inequality is less than one simultaneously, it is more or less horizontal.
Therefore we can conclude that Finland has very little inequality. There is no huge income
gap between the citizens, and everyone can enjoy a certain standard of living. All the citizens
are treated equally in Finland.
 Conclusion
Finland has been named the happiest country in the world for four consecutive years by
the United Nations Sustainable Development Solutions Network. As we have seen that the wage
inequality of Finland is constant over the years and the wage inequality measure of all the years is
also less than one (perfect inequality). Therefore, everyone is treated equally irrespective of their
wealth and everyone is given an opportunity to attain a certain standard of living. The economy of
Finland is positive. Although it is not the wealthiest country in the world, it still has a very good
manufacturing economy with large industries like electronics, vehicles, machinery and chemicals.
The manufacturing sector contributes towards the export market. This means that although
Finland does not have a very extraordinary economy, but still it maintains a constant rising
national income, GDP and per capita national income. Finland follows a flat working model
combined with flexible working hours. So, there are fewer numbers of intermediaries between the
management and workers, which implies more involvement in decision making. There exists
gender equality which is the primary requirement for the happiness of any country. Both the
males and females are given equal opportunities in the economy. Free education for all, not only
at the school level, but also at the university is also another indicator for happiness in the country.
Finland follows the old saying 'Education for all' irrespective of the person's position in the
society. They believe that students should start their careers with zero debt. Another characteristic
that makes Finland the happiest country is the fact that the country provides free healthcare for all
its citizens. The government expenditure and taxes are more or less constant and the
macroeconomic credit rating has the highest quality rating. The inflation and unemployment are
low. All these indicators make Finland the happiest country in the world.