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## Calculation of GDP for Country A and B

Questions:

(1). Table 1: GDP Data for Countries A and B

 Country A Country B \$billions \$billions Household Consumption 150 150 Government Purchases 250 250 Transfer payments 50 60 Total Gross Fixed Capital Expenditures 50 150 Change in Inventories 50 -50 Exports 40 40 Imports 20 20

Consider the data in table 1 for two countries: A and B.

a. Calculate the GDP for both countries.

b. Discuss the usefulness of these data in deciding which, if any, of these two countries is likely to be experiencing an economic recession.

(2). Obtain Australia's real GDP and CPI data from 1980 to 2015. Calculate the annual growth rates of real GDP and inflation and graph both series together. Is/are there some interesting or salient relationship(s) between those two series? Provide and discuss plausible economic explanation(s), including change in economic events and change in government policy, for the relationship(s) you identified.

(3). Obtain Australia's real GDP and unemployment data from 1980 to 2015. Calculate the growth rates of real GDP and unemployment and graph both series together. Is/are there some interesting or salient relationship(s) between those two series? Provide and discuss plausible economic explanation(s), including change in economic events and change in government policy, for the relationship(s) you identified.

Gross domestic product is the investment that is incurred on the final products and services produced by the economy and the imports are excluded. The formula for GDP is expenditures plus the gross capital formation plus the exports and subtracting imports. The term Gross implies that no subtraction has been done on the basis of depreciation of machines, buildings and different capital goods used during the process of production. The word domestic refers to the production undertaken by the resident of the country. And the term product signifies the end services and products (Kubiszewski et al. 2013).

a. Given the following data:

GDP data for country A and B:

 Country A \$billions Country B \$billions Household consumption 150 150 Government purchase 250 250 Transfer payments 50 60 Total gross fixed capital expenditure 50 150 Change in inventories 50 -50 Exports 40 40 Imports 20 20

Now we will calculate the GDP for both the countries:

GDP of country A= (Household consumption + government purchase + total gross fixed capital expenditure + change in inventories + exports – imports) ("Domestic product - Gross domestic product (GDP) - OECD Data", 2016).

= (150+250+50+50+40-20) billion dollars

= 520 billion dollars.

So, the GDP of the country is 520 billion dollars.

GDP of country B= (Household consumption + government purchase + total gross fixed capital expenditure + change in inventories + exports – imports)

= (150+250+150-50+40-20)

= 520 billion dollars.

So, the GDP for country B is also 250 billion dollars.

b. The above-provided data plays an important role in deciding, which country may probably face recession. Because the above-provided data helps in calculating the GDP of a country and as discussed in the introduction Gross domestic product is the investment that is incurred on the final products and services produced by the economy and the imports are excluded. The formula for GDP is expenditures plus the gross capital formation plus the exports and subtracting imports.

Household consumption is the expenditure incurred by the household for durable and non-durable goods. Household consumption is used in calculating the GDP of a country. We also include government expenditure in calculating GDP and exports of a country is also an important component in calculation GDP using the expenditure method. Gross fixed capital formation is originally the total investment. It is also an important component in calculating the GDP using expenditure method. It includes expenditure on the improvement of land, machinery, plant, equipment etc. the decrease in the Gross fixed capital formation was significant factor that fosters the recession in the United Kingdom and the financial depression of 1991 and 2008 witnessed a steep fall in the gross fixed capital formation (Egerer et al, 2016).

## Usefulness of GDP data in determining economic recession

Inventories are also included in the calculation of GDP. If there is fall in the inventories in a particular year than the difference between the previous year and the recent year is subtracted from the investment. However, the level of inventory is not a component of GDP but it affects the GDP by affecting the investment. Inventories increased when the firm produces more than the amount they sell (Egerer et al, 2016).

From the above data the GDP of both the countries are same but country A may face recession because the Total Gross Fixed Capital expenditures for country A is less than country B. And the inventories of country A are more than country B, the inventories for country B is in negative (Egerer et al, 2016).

Table 1 includes the real GDP, the CPI, the GDP growth rate and inflation rate of Australia for a period 1980-2015. The data for the GDP and CPI was obtained from Quandl. After obtaining the data, the GDP growth rate and the inflation rate of Australia were calculated for a period 1980-2015.

GDP growth rate is an indicator to highlight how fast an economy is flourishing. This is done by comparing the GDP of one-quarter with the previous quarter of the country. The growth rate of the GDP is directed by four important ingredients of the GDP, of which personal consumption is the most vital director of the GDP. Retail Sales are included in personal consumption. Business investment, government spending, and imports are also the important driver of the GDP growth rate (Amadeo & Amadeo, 2016).

The GDP growth rate in table 1, is calculated using the formula:

GDP growth rate= (GDP2 – GDP1 /GDP1) * 100

Where GDP1 is the GDP for the current year and GDP2 is the GDP of the preceding year.

The inflation rate is an instrument that measures the rate at which a currency is losing its value. Inflation rate also measures the rate at which the prices of products and services are increasing over a period, or how less a currency's one unit can buy at the present time, in compared to the past. One reason that may foster a rise in the inflation rate is excessive printing of money, which result in excessive supply of money and reduction in demand for money. Inflation may also occur when a certain commodity becomes scared and become costlier. Central banks increase and decrease the supply of money in the economy to control inflation. It is important for the inflation rate to fix the income securities, because the returns that are obtained from those securities may not comply with the rate of inflation, resulting in a loss for the investors (Jayaraman et al, 2013).

The inflation rate in table 1 is calculated using the formula:

Inflation rate = {(CPI1 /CPI0) – 1} * 100

Where, CPI1 IS the consumer price index for the current year and CPI0 is the consumer price index of the previous year.

 Date CPI GDP in billions of current dollars GDP growth rate inflation rate 1980-12-31 26.35 2862.5 12.17467249 1981-12-31 28.85 3211 4.17315478 9.487666034 1982-12-31 32.125 3345 8.762331839 11.35181976 1983-12-31 35.35 3638.1 11.06621588 10.03891051 1984-12-31 36.75 4040.7 7.572945282 3.96039604 1985-12-31 39.225 4346.7 5.601950905 6.734693878 1986-12-31 42.775 4590.2 6.099952072 9.050350542 1987-12-31 46.425 4870.2 7.8518336 8.533021625 1988-12-31 49.8 5252.6 7.712371016 7.269789984 1989-12-31 53.575 5657.7 5.689591177 7.580321285 1990-12-31 57.45 5979.6 3.251053582 7.232851143 1991-12-31 59.35 6174 5.916747651 3.307223673 1992-12-31 59.925 6539.3 5.190157968 0.968828981 1993-12-31 60.975 6878.7 6.252634946 1.752190238 1994-12-31 62.15 7308.8 4.861263135 1.92701927 1995-12-31 65.025 7664.1 5.690165838 4.625905068 1996-12-31 66.75 8100.2 6.2751537 2.652825836 1997-12-31 66.9 8608.5 5.584015798 0.224719101 1998-12-31 67.475 9089.2 6.286581877 0.859491779 1999-12-31 68.425 9660.6 6.4612964 1.407928863 2000-12-31 71.475 10284.8 3.276680149 4.457435148 2001-12-31 74.625 10621.8 3.348773278 4.407135362 2002-12-31 76.9 10977.5 4.857207925 3.048576214 2003-12-31 79.025 11510.7 6.639040197 2.763328999 2004-12-31 80.85 12274.9 6.670522774 2.309395761 2005-12-31 83 13093.7 5.821120081 2.659245516 2006-12-31 85.95 13855.9 4.486897278 3.554216867 2007-12-31 87.975 14477.6 1.664640548 2.356020942 2008-12-31 91.8 14718.6 -2.03755792 4.347826087 2009-12-31 93.425 14418.7 3.784668521 1.770152505 2010-12-31 96.1 14964.4 3.698778434 2.863259299 2011-12-31 99.3 15517.9 4.107514548 3.329864724 2012-12-31 101 16155.3 3.14385991 1.711983887 2013-12-31 103.5 16663.2 4.110254933 2.475247525 2014-12-31 106.05 17348.1 3.452251255 2.463768116 2015-12-31 107.675 17947 -100 1.532296087

Next, we have plotted the graph of the inflation rate and the growth rate of the GDP, in excel.

## Analysis of Australia's real GDP and CPI data

In the above graph, the blue line highlights the GDP growth rate and the orange line highlights the rate of inflation. The time period is highlighted on the X-axis and the GDP growth rate and the rate of inflation are highlighted on the Y-axis. From the graph, it is evident that the GDP growth rate started increasing from the year 1982 and it continued increasing till the year 1984 and the inflation rate also increased in the year 1982. In fact, both the components were displaying similar trend till 1985. Again in the year 1984 there was a fall in the GDP growth rate.

If the economy of a country is growing due to rising Aggregate Demand and if the AD is increasing faster than the production capacity, then such economic growth can give rise to inflation because due to the increasing demand the price of the products will also increase resulting inflation. Also in the period of rapid growth, the firms employ more numbers of labors, which will increase the job opportunities and the unemployment will fall. As a result, it will become tough for the company to fill up their vacancies thus increasing the wages. And when there is an increase in the wage rate then the company try to dodge the cost by passing it to the consumers ("Conflict between economic growth and inflation | Economics Help", 2015).

It is also possible to achieve economic growth without creating inflation. If the economic growth is due to increase investment and productivity, then it will result in increasing the productivity of the economy at the same pace as Aggregate demand. This helps in achieving economic growth without inflation ("Conflict between economic growth and inflation | Economics Help", 2015).

It is highlighted in the graph that during the period of global meltdown, that is the period after 2008 that the inflation rate went up sharply and the growth rate of the GDP shifted downward, in fact, it was in negative. During this period, both the inflation rate and the GDP growth rate displayed negative relationship. Then during 2009 when the GDP growth rate started shifting up, then the inflation rate started shifting downward. From 2010 both the inflation rate and the GDP growth rate started showing the same trend, till 2012 both the components were rising upward. Which means both the GDP growth rate and the inflation rate was increasing, indicating that there is growth in the economy. And this economic growth is due to the increasing aggregate demand, and the increasing demand is more than the capacity of the economy to produce. Due to which the goods and services become rare and result in increasing the price, thus giving rise inflation (Graph 1).

Even during the period 2000 to 2008 both the components were showing a negative relationship. During this period, the GDP growth rate was increasing and the rate of inflation was declining. During this period, the growth in the economy is due to the increasing productivity and investment, so there is no rise in the inflation rate and there is an increase in the growth rate of GDP (Graph 1).

## Relationship between GDP growth rate and inflation rate in Australia

Table 2 includes the unemployment, the real GDP, GDP growth rate and the rate of unemployment in Australia for a period 1980-2015. The data for unemployment was collected from the online site Quandl. And the value of the GDP growth rate and the unemployment rate was calculated.

GDP growth rate is an indicator to highlight how fast an economy is flourishing. This is done by comparing the GDP of one-quarter with the previous quarter of the country. The growth rate of the GDP is directed by four important ingredients of the GDP, of which personal consumption is the most vital director of the GDP. Retail Sales are included in personal consumption. Business investment, government spending, and imports are also important drivers of the GDP growth rate.

The GDP growth rate in table 1, is calculated using the formula:

GDP growth rate= (GDP2 – GDP1 /GDP1) * 100

Where GDP1 is the GDP for the current year and GDP2 is the GDP of the preceding year.

Unemployment is a situation when an individual belonging to the working population do not have a job but are willing to work and are desperately searching for a job. For example, if an employee leaves her job to bring her child up or if an individual leaves a job for higher studies than such situations are not considered as unemployment because in this situation they are no searching for a job ("Definition of Unemployment | Economics Help", 2010).

There are different types of unemployment:

• Unemployment due to deficient demand: such unemployment occurs when there is a lack of aggregate demand in the society.
• Structural unemployment: such unemployment occurs when the present workforce lacks the required skills and knowledge.
• Unemployment due to real wage: such unemployment occurs when the wages are above the equilibrium level.
• Frictional unemployment: such unemployment occurs when there are workers in between jobs. For example, it takes time for a school leaver to find a job. There always prevails frictional unemployment in an economy because every individual take sometimes finds a job that complements him.
• Voluntary unemployment: and such unemployment occurs when an individual is willing unemployed or they are not ready to work at the prevailing wage rate.

Unemployment rate is an important tool that measures the occurrence of unemployment and is calculated using the formula:

Unemployment rate= unemployment / total labour force * 100

 Date unemployment GDP in billions of current dollars GDP growth rate unemployment rate 1980-12-31 408.6106 2862.5 12.17467249 6.040514173 1981-12-31 393.8846 3211 4.17315478 5.722572011 1982-12-31 494.925 3345 8.762331839 7.087485274 1983-12-31 697.0384 3638.1 11.06621588 9.866659848 1984-12-31 641.2146 4040.7 7.572945282 8.900710573 1985-12-31 602.8681 4346.7 5.601950905 8.179751468 1986-12-31 613.1224 4590.2 6.099952072 8.006934771 1987-12-31 628.8614 4870.2 7.8518336 8.033761197 1988-12-31 576.2193 5252.6 7.712371016 7.162711935 1989-12-31 508.068 5657.7 5.689591177 6.122776171 1990-12-31 584.802 5979.6 3.251053582 6.870526237 1991-12-31 812.6211 6174 5.916747651 9.515920284 1992-12-31 917.517 6539.3 5.190157968 10.7209192 1993-12-31 933.7462 6878.7 6.252634946 10.81752748 1994-12-31 850.3487 7308.8 4.861263135 9.682852987 1995-12-31 757.7033 7664.1 5.690165838 8.438762705 1996-12-31 771.5511 8100.2 6.2751537 8.48667283 1997-12-31 763.4834 8608.5 5.584015798 8.385908788 1998-12-31 708.1152 9089.2 6.286581877 7.668925424 1999-12-31 639.9935 9660.6 6.4612964 6.888375373 2000-12-31 596.7537 10284.8 3.276680149 6.237930504 2001-12-31 651.7646 10621.8 3.348773278 6.714997589 2002-12-31 624.9985 10977.5 4.857207925 6.325681024 2003-12-31 592.2021 11510.7 6.639040197 5.909836792 2004-12-31 545.0514 12274.9 6.670522774 5.366156367 2005-12-31 523.5905 13093.7 5.821120081 5.017153014 2006-12-31 508.4875 13855.9 4.486897278 4.763715322 2007-12-31 477.6078 14477.6 1.664640548 4.356801924 2008-12-31 474.4643 14718.6 -2.03755792 4.227501217 2009-12-31 636.2413 14418.7 3.784668521 5.56440853 2010-12-31 605.9849 14964.4 3.698778434 5.205221283 2011-12-31 600.3173 15517.9 4.107514548 5.074995466 2012-12-31 625.0701 16155.3 3.14385991 5.37519481 2013-12-31 686.455 16663.2 4.110254933 5.721716226 2014-12-31 745.5787 17348.1 3.452251255 2015-12-31 17947

After calculating the real GDP growth rate and the unemployment, the graph of the unemployment rate and the GDP growth rate was plotted using excel.

In the above graph, the blue line highlights the GDP growth rate and the orange line indicates the unemployment rate. In short-run it is very difficult to highlight the relation between the economic growth and the unemployment rate. It is not uncommon for the unemployment rate to show a declining rate if the other important measures of economic are showing positive growth. The unemployment rate does start falling as soon as the economy of a country start growing after a period of recession because many companies have employees that are underutilized according to the salary they are offered and more over laying off employees during the period of recession or falling aggregate demand and again hiring new employees after the period of recession of when the aggregate demand increases (Graph 2).

As visible from the graph during the period between 1982 and 1983 both the unemployment rate and the GDP growth rate was increasing and during the period 1983 to 1985 both the unemployment rate and the GDP growth rate were declining (Graph 2).

Even during the period of great depression both the components were displaying similar trend, GDP growth rate, and unemployment rate both started falling but the GDP growth rate was falling at a higher rate, which shows that even during the period of recession the employment rate was increasing in Australia (Graph 2).

References

Amadeo, K. & Amadeo, K. (2016). How to Calculate the GDP Growth Rate. About.com Money. Retrieved 24 May 2016

Christiano, L. J., Eichenbaum, M. S., & Trabandt, M. (2013). Unemployment and business cycles (No. w19265). National Bureau of Economic Research.

Conflict between economic growth and inflation | Economics  Help. (2015). Economicshelp.org. Retrieved 24 May 2016,

Coyle, D. (2015). GDP: A brief but affectionate history. Princeton University Press.

Definition of Unemployment | Economics  Help. (2010). Economicshelp.org. Retrieved 24 May 2016,

Domestic product - Gross domestic product (GDP) - OECD Data. (2016). Data.oecd.org. Retrieved 24 May 2016,

Egerer, M., Langmantel, E., & Zimmer, M. (2016). Gross Domestic Product. In Regional Assessment of Global Change Impacts (pp. 147-152). Springer International Publishing.

Gregg, P., Machin, S., & Fernándezâ€ÂSalgado, M. (2014). Real wages and unemployment in the big squeeze. The Economic Journal, 124(576), 408-432.

Hobson, J. A. (2013). The Economics of Unemployment (Routledge Revivals). Routledge.

Jayaraman, T. K., Chen, H., & Bhatt, M. (2013). Inflation and Growth in Fiji: A Study on Threshold Inflation Rate. The Empirical Economics Letters, 2(12), 163-171.

Kendrick, J. W. (Ed.). (2012). The new system of national accounts (Vol. 47). Springer Science & Business Media.

Konchitchki, Y., & Patatoukas, P. N. (2014). Accounting earnings and gross domestic product. Journal of Accounting and Economics, 57(1), 76-88.

Kubiszewski, I., Costanza, R., Franco, C., Lawn, P., Talberth, J., Jackson, T., & Aylmer, C. (2013). Beyond GDP: Measuring and achieving global genuine progress. Ecological Economics, 93, 57-68.

MWORTH | Australia the real GDP. (2016). Quandl.com. Retrieved 24 May 2016.

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