Select your language

Suggested languages for you:
Log In Start studying!
StudySmarter - The all-in-one study app.
4.8 • +11k Ratings
More than 3 Million Downloads
Free
|
|

All-in-one learning app

  • Flashcards
  • NotesNotes
  • ExplanationsExplanations
  • Study Planner
  • Textbook solutions
Start studying

German Economy

Save Save
Print Print
Edit Edit
Sign up to use all features for free. Sign up now
Economics

Germany is the fourth-largest economy in the World by nominal GDP and the largest economy in Europe. The country is the world’s third-largest exporter and importer of goods. Being a part of the European single market, Germany has access to more than 450 million consumers.

The German economy: overview

Germany has a social market economy. In 2002, Germany introduced the common European currency, Euro. The European Central bank, headquartered in Frankfurt, sets monetary policies for the whole Eurozone.

German Economy Overview A picture of the ECB StudySmarterA picture of Frankfurt, Germany with the building of the European Central Bank on the left, Wikimedia Commons.

Germany is also the home of 29 of the Fortune Global 500 companies.

Germany has a stock exchange in Frankfurt which operates DAX, a German stock market index. The index lists well-known companies like Volkswagen, BMW, Audi, Siemens, Porche, Adidas, Allianz, Bosch, and Deutsche Telekom.

Germany also has a highly skilled labour force, a low level of corruption, and a good infrastructure. Research and development are highly regarded in Germany. Germany was ranked ninth in the Global Innovation index in 2020. That is why cities like Berlin and Munich are known as startup hubs.

German economy by sector

Germany has a service-based economy. In 2020, as figure 1 shows, the service sector in Germany contributed 70.4%, followed by the production industry which contributed 22.9% of the GDP. The remaining GDP was generated by construction (6%), and Agriculture, forestry and fishery (0.7%).

German Economy Overview StudySmarterFigure 1. Sector-wise GDP contribution in Germany. Created with data from Statista - StudySmarter.

Services

Germany is a financial hub. The financial, renting, and business activities contribute to 30% of their GDP. the country is also a famous tourist destination. It is the seventh most visited country in the world. The tourism sector contributes to 18% of the GDP. The service sector employs more than 70% of the workforce.

Industry

Germany tops the production of quality automobiles, machinery, electric equipment, and chemicals. In Germany, 99% of firms are categorised as small and medium-sized enterprises (SME). These companies are called ‘Mittelstand companies’ in Germany and they are global leaders in their niche. They do not diversify much from their focus but grow internationally to capture more market.

Primary sector

The primary sector in Germany is contracting. In 1991, the primary sector accounted for 4% of the country’s GDP and is now down to 0.7% in 2020. Despite this, agriculture is extremely productive in Germany. The mining industry in Germany is limited to Lignite, potash salt, boron, and selenium.

German economic system

Germany is a mixed economy.

A mixed economic system is a system that combines aspects of both capitalism and socialism.

More specifically, it is a social market economy.

Note: The term ‘social market’ is not be confused with the term 'socialist economy'.

In Germany, an individual is free to own property, has freedom of movement, free choice of occupation, freedom of association, and equality. Germany has a free market but under the laws of the German Constitution.

The German government provides health protection, unemployment and disability support, and pensions via individual and business contributions. The government tries to keep a fair market concerning monopolies or wrongful business practices.

The German government runs the social market economy via various government agencies. The active role of the government in the economy helps reduce many problems of a free market economy.

Mittelstand

As described earlier, 99% of companies in Germany are SMEs. In Germany, Austria, and Switzerland, Mittelstand is different from SMEs. In these countries, Mittelstand is considered a company with unique characteristics and not just quantitative classification.

Some characteristics of Mittelstand firms are that they're family-owned, have generational continuity, are independent and flexible, they focus on a niche, are innovative, socially responsible, local but with a global approach, and they invest in the workforce.

0.34% of the German companies which have revenues between €50 million to €1 billion also distinguish themselves as upper-sized Mittelstand firms such as Robert Bosch. The main areas that have Mittelstand companies are machinery, electrical equipment, auto parts, and chemicals.

The German economy’s worth

As we mentioned at the beginning, Germany is the fourth-largest economy in the world after the US, China, and Japan. The nominal GDP of Germany in 2020 was $3.85 trillion. Germany is also one of the richest countries in the world.

The GDP per capita in current US dollars is $46,208.4. Like all the major economies, the German economy is also showing a post-pandemic slow recovery due to the disruption of supply chains.

Inflation in Germany was expected to be around 5.3%. One of the reasons for this high inflation is that prices and VAT were dropped temporarily in the second half of 2020.

International trade in Germany

Germany is one of the most international economies in the world and the third-largest trading nation after China and the US. Exports contribute to 50% of the annual GDP in Germany. In 2016, Germany recorded the highest trade surplus in the world: it was worth $310 billion.

As Germany is export-oriented, in the years 2020 and 2021, German trade was mainly affected by the COVID pandemic and Brexit. The exports from Germany to the UK declined since 2019. The demand for German goods fell sharply as supply chains were disrupted due to the pandemic.

During this period, imports and export fell by 7.1% and 9.3% respectively as compared to the year 2019. The export was €1.2 trillion and import was €1 trillion1.

German Economy Worth StudySmarterFigure 2. Major exports of Germany. Created with data from the Federal Ministry of Economic Affairs and Energy, 2019 report - StudySmarter.

From figure 2, it is evident that car and car parts, machines, chemical products, and data processing devices contribute to more than 50% of Germany’s exports. Other major exports include electrical appliances, pharmaceutical products, vehicles, and metals. The top three german good importing countries are the USA, China, and France.

Circular economy in Germany

Today, in many countries, industries follow a linear economy.

Linear economy uses resources once and then discards them.

This is not sustainable as it is a wastage of valuable resources. Investors, consumers, and lawmakers around the world are backing up a sustainable approach toward the production of goods and services. They believe it can be achieved through a circular economy.

In a circular economy, manufacturers design products with minimum raw materials, to be reused and recycled, and use renewable energy sources.

A circular economy tries to keep a balance between industrial development and the environment.

In 2015, the European Commission approved an action plan that included 54 measures to ‘close the loop’ of the product life cycle to boost the circular economy in Europe. In 2020, they approved a Circular economy plan that has new measures for businesses, public authorities, and consumers.

In recent years, Germany has invested in renewable energy sources and digitization. A strong environmental technology exporter, efficient production chains, and a high number of patents have provided Germany with a strong base for the circular economy.

Germany has adopted a sustainable development strategy, the Resource efficiency program, and is developing national programs for sustainable consumption. Germany is a leader in waste management but lacks in other aspects of the circular economy like production and consumption, secondary raw materials, competitiveness, and innovation.

The Federal Ministry of Education and Research founded the Circular Economy Initiative Deutschland (CEID) in 2019 to promote the country’s economic transformation to a circular economy through a multistakeholder approach. The objectives of this program are to attain:

  • Circular business models and regulatory framework conditions.
  • New value networks and traction batteries.
  • New value networks for packaging.2

Germany needs a comprehensive, integrated circular economy strategy with concrete targets for aspects such as waste prevention, recycling, and total resource consumption. And it needs it sooner rather than later.

– Thomas Weber, Acatech, Vice-President and chair of CEID.

The future of the German economy

It is predicted that the German economy will grow by 3.6% in 2022 and by 2.6% in 2023 according to the European Commission. The growth will slow down due to supply chain bottlenecks and an expected fourth wave of the Covid-19 pandemic. (KPMG research, 2022).

The current unemployment rate is 5.1% which is expected to decline in 2022 as there is a shortage of skilled workers. After the pandemic, there is a huge demand for the services. The higher the demand, the higher the prices. Inflation will be 3.7% in 2022 and will come down to 2.1% in 2023.

The German economy is facing some challenges that should be tackled for a better future. Some of Germany’s economic challenges are digitization, disturbed supply chains, low birthrate, ageing population, and pressure on social structures due to migration.

Germany Economy - Key takeaways

  • Germany is the fourth-largest economy in the world by nominal GDP and the largest economy in Europe.
  • Germany is the world’s third-largest exporter and importer of goods.
  • Germany has access to more than 450 million consumers.
  • In 2020, the service sector in Germany contributed 70.4%, followed by the production industry which contributed to 22.9% of the GDP.
  • Germany is a social market economy.
  • 99.34% of companies in Germany are Mittelstand.
  • Germany tops the production of quality automobiles, machinery, electric equipment, and chemicals.
  • The nominal GDP of Germany in 2020 was $3.85 trillion.
  • The exports contribute to 50% of the annual GDP in Germany.
  • Germany has a good waste management system but it lags in other aspects of the circular economy.
  • It is predicted that the German economy will grow by 3.6% in 2022 and by 2.6% in 2023.

References

1. Federal Ministry of Economic Affairs and Energy, Facts about German foreign trade, 2019.

2. Circular economy Initiative- Deutschland. https://www.circular-economy-initiative.de/english#:~:text=Objectives,in%20Germany%20could%20be%20fostered.

German Economy

Germany is a mixed economy. More specifically, it is a social market economy. 

It is predicted that the German economy will grow by 3.6% in 2022 and by 2.6% in 2023 (European Commission). 

Germany is the fourth-largest economy in the world by nominal GDP and the largest economy in Europe. 

Germany is the fourth-largest economy after the US, China, and Japan. The nominal GDP of Germany in 2020 was $3.85 trillion. Germany is one of the richest countries in the World. GDP per capita in current U.S. dollars is $46,208.4. 

The main characteristics of the German economy are

  1. High international trade
  2. 99% of companies are Mittelstand
  3. Social market economy
  4. Highly innovative
  5. Many companies are the World leaders in their niche
  6. Moving towards circular economy

Final German Economy Quiz

Question

What type of economy does Germany have?

Show answer

Answer

Germany has a social market economy.

Show question

Question

Can German products be sold anywhere in Europe?

Show answer

Answer

Being a part of the European single market, Germany has access to more than 450 million consumers. 

Show question

Question

Where is the German stock exchange located? 

Show answer

Answer

The German stock exchange is located in Frankfurt am Main.

Show question

Question

What is the index of the German stock market?

Show answer

Answer

DAX index

Show question

Question

Which sector in Germany has a major contribution towards GDP?

Show answer

Answer

Service sector

Show question

Question

Are Mittelstand companies same as SMEs?

Show answer

Answer

No. Mittelstand companies have different characteristics like family-owned, flexible, and focussed on a niche than SMEs.

Show question

Question

What is the circular economy?

Show answer

Answer

In a circular economy, manufacturers design products with minimum raw materials, to be reused, recycle, and use renewable energy sources. 

Show question

Question

Is circular economy the same as waste recycling?

Show answer

Answer

No. In a circular economy, products are produced to reuse using renewable resources and without causing damage to the environment. Waste recycling is a part of a circular economy.

Show question

Question

What challenges is the German economy facing currently?

Show answer

Answer

The challenges are digitization, disturbed supply chains, low birthrate, aging population, and pressure on social structures due to migration.

Show question

Question

Why did the growth of the German economy shrink in 2020?

Show answer

Answer

The German economy shrunk by 0.5% in 2020 because of Brexit and the Covid-19 pandemic.

Show question

Question

What is a social mixed economy in Germany?

Show answer

Answer

Germany has a free market but under the protection of the German constitution.  The German government provides health protection, unemployment and disability support, pensions via individual and business contributions. 

Show question

Question

What are the main exports of Germany?

Show answer

Answer

Machinery, auto parts, chemicals, and electrical equipments.

Show question

Question

What was the contribution of the primary sector in German GDP in 2020?

Show answer

Answer

0.7%

Show question

Question

Can a company with 500 employees but revenue of 1 Billion be a Mittelstand?

Show answer

Answer

Yes. These companies are classified as Upper-Mittelstand. It is not an SME as SMEs have revenue till 50 million.

Show question

60%

of the users don't pass the German Economy quiz! Will you pass the quiz?

Start Quiz

Discover the right content for your subjects

No need to cheat if you have everything you need to succeed! Packed into one app!

Study Plan

Be perfectly prepared on time with an individual plan.

Quizzes

Test your knowledge with gamified quizzes.

Flashcards

Create and find flashcards in record time.

Notes

Create beautiful notes faster than ever before.

Study Sets

Have all your study materials in one place.

Documents

Upload unlimited documents and save them online.

Study Analytics

Identify your study strength and weaknesses.

Weekly Goals

Set individual study goals and earn points reaching them.

Smart Reminders

Stop procrastinating with our study reminders.

Rewards

Earn points, unlock badges and level up while studying.

Magic Marker

Create flashcards in notes completely automatically.

Smart Formatting

Create the most beautiful study materials using our templates.

Sign up to highlight and take notes. It’s 100% free.