Measuring GDP And Economic Growth: Calculation And Analysis Essay.

Calculating national accounts and nominal and real GDP for Maritime Republic

• This assignment is worth 25 per cent of total assessment and is to be submitted by 00pm, Thursday 11 January 2018.
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2. Assignment Questions

Question 1 – 20 marks

Measuring GDP and Economic Growth

The national accounts of Parchment Paradise are kept on (you guessed it) parchment. A fire destroys the statistics office. The accounts are now incomplete but they contain the following data:

• GDP (income approach): $2,900
• Consumption expenditure: $2,000
• Indirect taxes less subsidies: $100
• Gross income at factor cost: $2,800
• Investment: $800
• Government expenditure: $400
• Wages: $2,000
• Net exports: –$200
• Calculate GDP using the expenditure approach. 

(b)     Calculate the sum of total income less wages and the statistical discrepancy. 

The table below provides data on the economy of Maritime Republic that produces only fish and crabs. Quantities

2015 2016

Fish

1,000 tonnes

1,100 tonnes

Crabs

   500 tonnes

  525 tonnes

Prices

Fish

$20 a tonne

$30 a tonne

Crabs

$10 a tonne

 $8 a tonne

(c. )Calculate Maritime Republic’s nominal GDP in 2015 and 2016.

(d) Calculate Maritime Republic’s chain volume measure of real GDP in 2016 expressed in 2015 dollars. 

Totally Gross

          GDP has proved useful in tracking both short-term fluctuations and long-run growth. Which isn’t to say  GDP doesn’t miss some things. Amartya Sen, at Harvard, helped create the United Nations’ Human Development Index, which combines health and education data with per capita GDP to give a better measure of the wealth of nations. Joseph Stiglitz, at Columbia, advocates a “green net national product” that takes into account the depletion of natural resources. Others want to include happiness in the measure. These alternative benchmarks have merit but can they be measured with anything like the frequency, reliability and impartiality of GDP?

Source: Time, 21 April 2008

• Explain the factors that the news clip identifies as limiting the usefulness of GDP as a measure of economic welfare.
• What are the challenges involved in trying to incorporate measurements of those factors in an effort to better measure economic welfare?
• What does the ranking of Australia in the Human Development Index imply about the levels of health and education relative to other nations? 

Question 2 – 20 marks

Jobs and Inflation

Australian Bureau of Statistics reported the following data for 2015:

Labour force participation rate: 69.6 per cent

Working-age population (in thousands people): 18,429,726

Employment-to-population ratio: 65.2

• Calculate the labour force. (2 marks)

• Calculate the employment. (2 marks) In New South Wales in October 2015, the labour force was 3,803,200 and 200,500 people were unemployed. In November 2015, the labour force decreased by 300 and the number employed increased by 2,900. Calculate the unemployment rate in November 2015. (2 marks) 

A typical family on Sandy Island consumes only juice and cloth. Last year, which was the base year, the family spent $40 on juice and $25 on cloth. In the base year, juice was $4 a bottle and cloth was $5 a length. This year, juice is $4 a bottle and cloth is $6 a length.

• Calculate the CPI in the current year (2 marks) 

• Calculate the inflation rate in the current year. What does it indicate on the price level?            (2 marks) 

Unemployment and Job Vacancies Rise

          The number of job vacancies in Australia rose 3.2 per cent in the three months to August 2011, official statistics show. The number of job vacancies in the private sector was 170,000 in August, a rise of 4.1 per cent from 163,300 in May. There were 17,100 vacancies in the public sector in August, down 4.4 per cent from vacancies recorded three months earlier. Over the same three months, the unemployment rate increased from 5 per cent to 5.3 per cent.

Sources: News.com.au, 29 September 2011 and ABS

• If the labour market is working properly, why are there job vacancies and unemployment? Why don’t all the job vacancies get filled by unemployed workers?(2 marks) 

• Are the additional workers who couldn’t find jobs in the three months to August 2011 most likely part of the economy’s structural unemployment or part of its cyclical unemployment? Explain your answer. (3 marks) 

Quantity Expansion (QE) of Money in the European Union (EU) 

On March 9 2015, the European Union (EU) commenced quantity expansion of money, Euro (€). The European Central Bank (ECB) has increased the quantity of money by 60 billion euro every month in the open market in an attempt to support the economy of EU countries. The large increase in the quantity of money is expected to have significant impacts on a range of economic sectors in the EU and global financial markets.    

• Analyse how the quantity expansion of euro money is likely to affect money supply, interest rate, investment and consumption, and economic growth in the EU. Draw relevant graph(s) for your analysis.  (5 marks) 

Question 3 – 20 marks      

Global Saving Glut and U.S. Current Account, remarks by Ben Bernanke (when a governor of the Federal Reserve) on 10 March 2005:

The U.S. economy appears to be performing well: Output growth has returned to healthy levels, the labour market is firming, and inflation appears to be under control. But, one aspect of U.S. economic performance still evokes concern: the nation’s large and growing current account deficit (negative net exports). Most forecasters expect the nation’s current account imbalance to decline slowly at best, implying a continued need for foreign credit and a concomitant decline in the U.S. net foreign asset position.

• Why is the United States, with the world’s largest economy, borrowing heavily on international capital markets—rather than lending, as would seem more natural?
• What implications do the U.S. current account deficit (negative net exports) and our reliance on foreign credit have for economic performance of the U.S. economy?
• What policies, if any, should be used to address this situation?

Exchange Rate and Balance of Payments

Colombia is the world’s biggest producer of roses. The global demand for roses increases and, at the same time, the central bank in Colombia increases the interest rate. In the foreign exchange market for Colombian pesos, what happens to

1. The demand for pesos?
2. The supply of pesos?
3. The quantity of pesos demanded?
4. The quantity of pesos supplied?
5. The exchange rate of the pesos against the Australian dollar? 

Balance of Payments 

The table gives some information about the U.S. international transactions in 2008.

1. Calculate the current account balance.

Item

Billions of U.S. dollars

Imports of goods and services

2,561

Foreign investment in the United States

   955

Exports of goods and services

1,853

U.S. investment abroad

   300

Net interest income

   121

Net transfers

 −123

Statistical discrepancy

     66 

1. Calculate the capital and financial account balance.

1. Did U.S. official reserves increase or decrease? 

1. Was the United States a net borrower or a net lender in this year? Explain your answer.

Calculating national accounts and nominal and real GDP for Maritime Republic

Question 1: Measuring GDP and Economic Growth

Answer a

GDP under expenditure approach

Answer b

Sum of total income = $2900

Wages = $2000

Statistical Discrepancy = GDP at expenditure approach – GDP at income approach

                                      = $3000 - $2900

                                      =$100

Total income less wages and statistical discrepancy = $2900 - $2000 - $100

                                                                                   =$800

 Answer c

Nominal GDP in 2015

Nominal GDP in 2016

Answer d

Real GDP in 2016

Chain volume measure of real GDP

To determine the chain volume measure of real GDP the following information are needed

2015 quantities at 2015 prices = Nominal GDP of 2015 = $25,000

2016 quantities at 2015 prices = (1100*$20) + (525* $10) = $27,250

2015 quantities at 2016 prices = (1000 *$30) + (500 *$8) = $34,000

2016 quantities at 2016 prices = Nominal GDP of 2016 = $37,200

GDP growth rate at 2015 prices,

GDP growth rate at 2016 prices,

Average growth rate in two year

Real GDP in 2016 (Chain weighted)

Answer e

            Gross Domestic Product measures the monetary value of goods produced within the nation in a given year. GDP includes only quantitative aspects that have monetary value. However, economic welfare does not limited to quantitative aspects only (Agénor and Montiel 2015). The true picture of economic welfare needs to include qualitative factors as well. As suggested by Amartya Sen in the new clip, quality of health and education indicate state of economic welfare. However, GDP does not include such things. Joseph Stiglitz advocates for incorporating natural resource depletion in measuring net national product. Happiness is another thing that is not a part of GDP. These are some factors limiting the use of GDP as a measure of economic welfare.

Answer f

            GDP includes factors that have monetary values. There is no monetary unit of measuring quality of health and education. Government provides these services as free in order to ensure a minimum standard health and education. Those services cannot be measure in monetary terms.  Another factor is depilation of natural resources. Natural resources are used in productive activities. GDP measures the value of final output. Continuous use of natural resources ends up stock of these resources (Scarth 2014).

The rate depletion cannot be modelled. Happiness is another factor that cannot be indexed. Therefore, though all these factors have their own merit in presenting economic welfare the question remain regarding whether they are as compatible as reliability, impartiality and frequency of GDP.

Alternative benchmarks for measuring economic welfare

Answer g

            Human Development Index measures progress of a nation in terms of three basic indicators of human development – a healthy and long life, having access to education and decent living standard. The ranking of Australia with respect to Human Development Index is second, next to Norway. The HDI value of Australia is 0.939 (hdr.undp.org 2018). Australia shared the same position in HDI ranking with Norway. Life expectancy at birth in Australia is recorded as 82.5 years, which is even greater than that in Norway having 81.7 years of life expectancy. The expected years of schooling for Australia is 20.4 years.

This is again higher than Norway that have 17.7 years of expected schooling and Switzerland having 16 years. In terms of average schooling years, Australia is ahead of Norway. The average years of schooling in Australia is 13.2 years. Therefore, in terms of health and education Australia is in a better position than most other nation. This signifies remarkable progress of Australia in Human development.

Question 2: Job and Inflation

Answer a

Answer b

Answer c

Number of people unemployed in October 2015 = 200,500

Labor force = 3,803, 200

Therefore,

Number of people employed in 2015 = 3,803, 200 - 200,500

                                                             = 3,602,700

Therefore,

Answer d

Expenditure on juice in the base year = $40

Price of juice per bottle in the base year = $4

Therefore, bottle of juice consumed in the base year = $40/$4 = 10

Expenditure on cloth in the base year = $25

Price of cloth per length in the base year was = $5

Therefore, length of clothe used in base year = $25/$5 = 5

Answer e

The inflation rate implies that average price level increases by 7.69%.

Answer f

            There is a close relation between the rate of job vacancy and consequent unemployment rate. The higher vacancy in general should be accompanied with a low unemployment rate. However, in recent years the positive relation between vacancy rate and unemployment rate does not held up well Australia. The unemployed workers find it difficult to get work. This is perhaps because of locational mismatch and mismatch of skills. Job are not created in areas where unemployed person are (theguardian.com 2016). The skills of unemployed workers might not match with skills required to fill the vacancies.

Answer g

            The people who are unable to find jobs are part of economy’s structural unemployment. Structural unemployment refers to the type of unemployment where people remain unemployed because of structural mismatches. Cyclical unemployment on the other hand implies unemployment arising from business cycle fluctuation (Heijdra 2017). In Australia, the scenario of labor market change as compared to past.

Limitations of GDP as a measure of economic welfare

The problem that Australia is facing is that despite growing number of job vacancies the employment growth has slowed down. Job vacancies are higher in states like Victoria and New South Wales while it is weak for states like Western Australia, Northern Territory and Queensland. Because of uneven distribution of job vacancies, problem of unemployment remain in Western Australia, Northern Territory and Queensland. Vacancies are mostly in industries like administration and support industry, followed by retail trade. Among the top five industries having most number of job vacancies have highest share of part time workers.

Hence, people are still looking for full time jobs. As unemployed people are unable to get work because of locational mismatch or skill mismatch, it is part of economy’s structural unemployment.

Answer h

            The quantity expansion of euro money effect different nominal and real variables of the economy. There are channels through which the effect of such quantity expansion affects economic growth (Mankiw 2014).  The first direct impact is on interest rate.Figure 1: effect of quantity expansion of money on interest rate

(Source: as created by Author)

            The supply of real money balance is fixed and therefore is given by a vertical straight line. The money demand curve is DD. The interest rate is in the money market is determined from the intersection of money supply and money demand cure. The initial equilibrium is at E. Prevailing interest rate is r*. Now, when EU increases the quantity if Euro then the money supply curve shifts rightward from S to S₁. The equilibrium shifts from E to E_1. At the new equilibrium the interest rate decreases from r* to r_1.Figure 2: Effect on investment

(Source: as created by Author)

            The direct effect of interest rate is on the investment. Interest rate is the cost of investment and hence s inversely proportional to investment. When interest rate is r* then I* is the investment demand. As the interest rate declines from r* to r₁, investment increases from I* to I₁.Figure 3: effect on consumption and economic growth

(Source: as created by Author)

            When invested funds are used for expanding production then more goods are available in the economy for consumption. With investment expansion, new job opportunities are created and hence, employment increases. All this affect the planned expenditure curve. The equilibrium output or income is determined from the intersection of actual and planned expenditure (Uribe and Schmitt-Grohé 2017). As the actual expenditure curve shifts upward, the economy’s output will shift from Y* to Y₁ leading to an economic growth.         

Question 3

Global saving glut and U.S Current Account

Answer a

            Over the past few decade, a range of diversified forces have resulted in a global saving glut and help to explain factors behind growing current account deficit in U.S and a relatively low interest rate in the global market. The global saving glut theory explains that there is a rapid increase in savings in rest of the world, particularly in China. This encourages foreigners to purchase assets from U.S in place of exports. In order to finance the purchase of assets in United States the foreigners are trying to sell goods and services in US as much as leading to a fall in prices of these items in United States.

The balance of payment identity requires that payment received by US resident from rest of world should match with payment made by US residents. The accounting convention make the identity to hold always. An excess of payment received over payment made is counted as asset purchase of US residents in rest of the world. This in turn implies US residents are borrowing from foreigners.

Answer b

            In the presence of current account deficit, foreign countries lend to deficit bearing countries or invest in different business. The persistent current account deficit is not good for nation. The foreign investors lose confidence for investing in the country and worry whether to get adequate return. The current account deficit in US and its reliance on foreign capital will bring similar threat for US economy. Deficit in current account balance reduces safety of investing in the economy. Once the investors feared about definite return from the invested fund, they will start pull back money from the US economy (thebalance.com 2018).

This will have a disruptive effect on performance of US economy. There will be depreciation of currency moving up the trade balance towards a surplus. US mostly trade goods as its services are not much substitutable to the rest of the world. There is possibility that construction industry would crash. In order to repay the foreign creditors US needs large export industries. However, presence of current account deficit lead to a contraction of these industries. Therefore, the reliance on foreign capital and current account deficit lead to an uncertain future of US economy.

Answer c

            In order to mitigate risk arising from reliance on foreign capital borrowing is to encourage personal savings without providing tax incentives. The sufficient amount of domestic saving can only replace external borrowings from overseas. A suggested way to increase domestic saving rate is to implement automatic payroll deduction plan. US should focus on reducing their current account deficit. For this, some suggested policy include devaluation of exchange rate, reducing reliance on import as much as possible, encourage competition in the domestic and export industry.

Exchange rate and Balance of Payment

            When the global demand for rose increases, being world’s biggest producer of roses, the export demand for rose in Colombia increases. With increase in export, more foreign currency enter in the foreign exchange market. This causes an increase in the supply of foreign currency resulting in a rightward shift of the supply curve.

            The Colombia central bank at the same time takes the policy to increase the interest rate. An increase in domestic interest rate means there is an increase in asset demand denominated in Colombian currency (Dullien et al. 2017). In the foreign exchange market, increased demand for Colombian Pesos in turn implies a relatively small demand for Australian dollar.

The effect on Colombian foreign exchange market is shown belowFigure 4: Exchange rate market for Colombian Pesos

(Source: as created by Author)

The demand for Colombian Pesos increases following a hike in interest rate by the central bank.

The supply of Pesos decreases.

What happened to quantity demanded and quantity supplied of pesos that cannot be said with certainty. The effect on equilibrium quantity demanded and quantity supplied is subject to the relative magnitude of demand and supply curves and corresponding position of supply and demand curves.

In the exchange rate market of Pesos against Australian dollar, there is a decrease in the exchange rate. This means Colombian Pesos will appreciate.

Balance of Payment

Answer a          

Answer b

Answer c

The negative balance in official settlement account means the official reserves in United States are increasing.

Answer d

From the information given regarding balance of payment account, it is clearly observed that foreign investment made in United State is greater than the investment US made aboard. Therefore, US was a net borrower.

 References

Agénor, P.R. and Montiel, P.J., 2015. Development macroeconomics. Princeton university press. Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-Hill Higher Education.

Dullien, S., Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2017. Macroeconomics in Context: A European Perspective. Routledge.

Hdr.undp.org. (2018). | Human Development Reports. [online] Available at:  [Accessed 14 Jan. 2018].

Heijdra, B.J., 2017. Foundations of modern macroeconomics. Oxford university press.

Jericho, G. (2016). Job vacancies are up. So why isn't unemployment down? | Greg Jericho. [online] the Guardian. Available at: job-vacancies-are-up-so-why-isnt-unemployment-down [Accessed 14 Jan. 2018].

Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.

Scarth, W., 2014. Macroeconomics. Edward Elgar Publishing.

The Balance. (2018). The U.S. Current Account Deficit -- Threat or Way of Life?. [online] Available at: [Accessed 15 Jan. 2018].

Uribe, M. and Schmitt-Grohé, S., 2017. Open economy macroeconomics. Princeton University Press.