This graph should be copied and pasted as an image into your Assignment Word document. Now, explain the economic history of the Indian economy using Rea GDP and business cycle theory.
Discuss the difference between Nominal GDP per capita and Real GDP per capita. Compare theIndian economy with the Australian economy in 2016. (500-600 words).
“I have seen young people order smashed avocado with crumbled feta on five-grain toasted bread at $22 a pop and more. I can afford to eat this for lunch because I am middle-aged and have raised my family. But how can young people afford to eat like this? Shouldn't they be economising by eating at home? How often are they eating out? Twenty-two dollars several times a week could go towards a deposit on a house”. (Salt, B. (2016, October 15-16). I belong to a secret society and I am looking for new recruits. The Weekend Australian Magazine.) Use supply and demand analysis and a correctly labelled diagram to explain why this article had a stimulating effect on the avocado market (sales of avocados tripled). [Hint: There is no such thing as “bad publicity”.
GDP and Per Capita GDP Growth of India
Economic cycles are particular feature of market economies. There are alternate phases of expansion and contraction characterizing phases of business cycle. The paper aims to discuss growth history of Indian economy in light of tradition business cycle theory. Business cycle did not exist in predominant form prior to 1990s. The economy was not driven much by market forces. In the phase of crisis in 1991, the policy of economic openness was undertaken which made the economy vulnerable to market forces (Kalecki, 2016). The analysis of business cycle has become more interesting after beginning of the process of liberalization in India. The real and nominal GDP and per capita GDP growth is considered to analyze growth history of Australia. After evaluating economic growth of India, a comparison has been made between Australia and Indian economy. Per capita GDP is mainly used as a measure to compare economic state of both the nation. Other indicators like population size, GDP and unemployment are also taken into consideration to get an overall picture.
The figure below presents both GDP and Per capita GDP of India measured in current and constant US dollar. GDP is a measure of overall output while per capita GDP shows the ratio of GDP to total population. As huge difference exists between values if these two indicators, in order to represent them in s single graph two different axis are used to measure GDP and per capita GDP separately. The two indicators are measured for a period ranging from 1961 to 2016.
The figure shows a clear upward rising trend for both GDP and per capita GDP of India. This indicates there is an overall increase in output and living standard in the nation. Real GDP and per capita real GDP however lies above GDP and per capital GDP measured in current prices, reflecting a stable of declining level inflationary pressure overtime.
As obtained from the above graph, the nominal and real GDP and that of per capita GDP constitute a more or less smooth upward trend. The absolute value of GDP and per capita GDP reflect an overall satisfactory. Looking at the graph, very small fluctuations are observed in the overall trend. The fluctuations seem to be widely varied in terms of growth rate. The variation in GDP or output growth can be analyzed in light of business cycle theory (Mankiw, 2014). It is a very useful theory for understanding underlying recession or expansion in an economy.
Business Cycle Theory
The periodic expansion and recession in the economy as identified from aggregate output, employment and other economic activity is termed as business cycle. In the business cycle there occurs periodic boom and slump depending on internal and external shock in the economy. Accordingly, state of the economy is classified according to the four stages of business cycle- expansion, boom, recession, trough. When output and employment in an economy along with other economic activity expands then it is called expansion stage of business cycle (Maurice & Thomas, 2015). Continuous expansion takes the economy to a highest point beyond which the economy cannot expand. This is identified as the period of economic boom. The growth then slows down and the economy enters the phase of recession when a downward movement is observed in all the economic activities with a contraction in output and downward pressure on the price level. Persistent recession moves the economy towards depression or trough. From this point again expansion starts marking beginning of a new business cycle.
The Indian economy has undergone dramatic fluctuation in its trend growth rate. The fluctuating growth trend provides useful insight regarding the existence of business cycle. For the period 1961-2016, several recession and expansions took place in the economy. The period of recession and expansion can be identified from observing the real GDP growth rate (Sherman, 2016).
The period extending from 1961 to 1965 was a period of economic expansion. Annual GDP growth during this time was increased from 3.72% in 1961 to a peak rate of 7.45% in 1964. GDP fell sharply after 1964. The growth rate fell to -2.64%. The downturn continued in 1965 as well. The period of 1965-1966 can be identified as the period of recession or trough. The sharp decline in output was mainly contributed from a sudden decline in agricultural output. Indian then being primarily dependent on agriculture, fluctuation in agricultural output causes output to fluctuate at a great extent. The agricultural production during this was interrupted due to drought. A gradual recovery occurred after this with growth rate being 7.83 percent in 1967. Growth rate however was not sustained at this level (Ma?kowiak & Wiederholt, 2015). Growth rate fluctuated around 4% until it reached to 1.64% in 1971. In 1972, growth rate was again negative to -0.55. The economy performed quite well till 1978. A phase of recession again began in 1979-1980 with a negative growth rate of -5.24%. Bit agriculture and manufacturing experienced a negative growth in output. The period of 1980s was not much fluctuating and there was no major turning point. In the 1990s, there were two recessions at an interval of 5 years. The first was from March 1991 to September 1991. The growth rate fell to 1.06%. In order to rescue the economy from recessionary crisis a number new policy measures were undertaken (Bal, Dash & Subhasish, 2016). The policy tool was compositely known as LPG – Liberalization, Privatization and Globalization. Recovery in the growth rate has been observed from 1992. In 1996, the growth was 7.55%. Immediately after this period, a very short recession was experienced in 1997.
Fluctuations in the Indian Economy
In context of Indian economy, the business cycle concept was quite contradictory to the general perception of the business cycles of phases of expansion followed by a period of contraction. The business cycle fluctuations during this time was mainly caused by external factor-monsoon. The interruption of agricultural production hampered the output growth. Till 1990s the economy relied heavily on agriculture. The contribution of agriculture in total output then was 40 percent (Kaushal & Pathak, 2015). The traditional business cycle generally captures economic fluctuation arising from forces of market economies like price rigidity, role of expectations, information asymmetry or technology. Till 1900s, it was monsoon cycle that caused fluctuation in GDP rather than interruption through market forces. However, after 1990s the forces behind cycle fluctuation have changed gradually. Indian economy gradually entered to the phase what is called growth cycles. In 1997-98, the agricultural output again fell to a lower level. However, during this did not cause any severe recession in India as the sectoral composition of India had already been changed with a smaller contribution of agricultural and greater contribution of manufacturing or service sector (Hussaini, Abdullahi & Mahmud, 2015). the contribution of agriculture in 1990s was 26 percent as compared to 40 percent.
The annual growth rate at the end of 1990s was 8.85 percent. At the beginning of twenty first century the annual growth rate stood at 3.84 percent. The growth performance of Indian economy was quite impressive from 2003 to 2007 as growth varied between 7.8 percent to 9.8 percent. After reaching a peak growth rate of 9.8%, growth rate fell to 3.89% which is also a moderate growth rate (Agrawal, 2015). With a quick recovery India soon achieved a double digit growth rate of 10.26 percent (highest since 1960s) in 2010. The growth rate though declined but the economy is still expanding at a rate of 7%.
Average income or average output of a nation is measured in terms of per capita GDP. It is obtained by dividing real and nominal and real GDP with respective size of population. The only difference between nominal and real per capita GDP exists in terms of adjustment of inflation. Nominal GDP is used using current year market prices while real GDP uses market price of a fixed base year (Goodwin et al., 2015). This is the reason why real GDP is called GDP at constant prices. Nominal and real GDP is differed based on the movement of price level. Per capita is considered as the direct indicators of living standard. The nominal per capita GDP provides the measure of per capita income in current year prices while real GDP per capita does the same but with respect to a fixed base year.
Comparison of India and Australia
The easiest way to compare living standard of two nations is to compare per capita GDP of the two nations. A higher per capita GDP is an indicative measure of a higher living standard and vice-versa (De Vroey, 2016). For Australia and India, per capita GDP measured in terms of both current and constant prices are compared. The following two figures represent per capita GDP of Australia and India measured both in current and constant US dollar.
Both the figures clearly show that per capita of Australia in absolute term is much greater than that of India. The difference in per capita GDP is even larger when measured in current year prices. From this, a general contention can be made that Australian people enjoy a much higher living standard than Indian people do. However, higher per capita GDP does not necessarily indicate a higher output or higher GDP. The higher GDP might be the result of a small population. In 2016, per capita GDP of India in constant US dollar is estimated to be 1861.49. The corresponding figures for Australia is 55670.92. The per capita GDP measure in current US dollar is 1709.59 for India and 49927.81951 for Australia. Per capita GDP in its absolute value is though higher for Australia but both the nation showed a general upward trend in average output overtime. The single measure of per capita GDP cannot represent the overall economic scenario of both the nation. Other indicators such as gross domestic product, employment, size of population, inflation and such others need to be considered.
The GDP figure for Australia in 2016 is 1204.62 USD billion while that for India is 2263.79 USD billion (tradingeconomics.com, 2018). This indicate the aggregate output in India is much greater than that for India. Smaller per capita income in India therefore solely resulted from large size of population. The total population in India in the year 2016 is 1,324,171,354 as compared to 24, 386,000 in Australia. The relatively large population thus understate the figure for per capita GDP. Condition of labor market in another indicator of economic performance. The rate of unemployment in an economy thus offers useful insights regarding performance of the economy. Measured unemployment rate for Australia in 2016 is 6.2 percent (tradingeconomics.com, 2018). The unemployment rate in India in the same year is 3.52 percent. High unemployment rate in Australia represents a weak performance of labor market. This indicates that instead of having a large size population unemployment in India is smaller. This is possible because of a higher GDP in India. In terms of economic performance, India despite being a developing nation, is really performing well over Australia in some important aspects.
Per Capita GDP as a Measure of Living Standards
The paper summarizes growth history of Indian economy. Like many other nations, the Indian economy has undergone different phases of business cycle. Till 1990s, the nation experienced four periods of recession – 1965-66, 1979-80, 1991 and 1997. Prior to 1990s, output fluctuates mainly due to interruption in agricultural output. Agriculture then was one important contributor of GDP. Gradually the economy shifts from agriculture of manufacturing and service sector and thus the output was stabilized from fluctuation in agricultural output. In 1991, a balance of payment crisis occurred in the economy resulting in a severe recession. However, the economy gradually recovered from recession and attain a stable rate of growth. Indian economy is currently going through a phase of economic expansion with a stale rate of growth of 7%. The economic expansion helps the nation to achieve GDP which is greater than Australia. The effect of higher GDP is however deemed because of a large size of population. The per capita GDP though is relatively small in for India but still unemployment rate much lower in India than that in Australia.
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