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Using the Expenditure Method to Calculate GDP

Question:

Discuss about the Economics Assignment for Gross Domestic Product.

Gross Domestic Product (GDP) of a country is defined as a sum total of all final goods and services produced in an economy within the territories of the countries. There are three methods of calculating GDP, income method, expenditure method, and production method. In income method, the annual income of all individuals of a country is added together, in expenditure approach, all expenditures made by the individuals in a country is added together and in production method, the market values of all final goods and services are added to obtain GDP (Mankiw 2014).

According to the given data set, expenditure method is used to calculate GDP

GDP = C + G + I + (X – M)

GDP = Household consumption + Government purchases + Total Gross fixed capital expenditures+ change in inventories+ (Export – Import)

(Note: government purchases does not include transfer payments, so transfer payments are not taken in calculation)

GDP for Country A = 150 +250 + 50 + 50 + (40-20) = $ 480 billions

GDP of Country B = 150 + 250 +150 -50 + (40 -20)  = $ 520 billions

The GDP of country A is $480 billion which is less than country B’s GDP, i.e. $ 520 billion. It indicate that the market value of all final goods and services produced in country B is greater than the market value of all final goods and services produced in country A. The market value indicates the price level of the country. Hence higher GDP in country B gives an indication of higher price level in country B as the calculation is based on market value (Kubiszewski et al. 2013).

There may be several reasons for higher price level, such as higher demand of goods by the consumer. If the demand of goods increases, without any change in supply then it leads to rice in price (Vespignani 2013). The rise in demand also indicates, rise in income in the country which implies rise in employment and production of the country. All it together indicates that the country is going through a boom period. On the other hand, as GDP in country A is lower than in country B, it gives the opposite indications, i.e., the price level in country A is lower than that in country B (Miles et al. 2012). Further, the demand in country A is also lower than in country B. As demand in country A is less, so the income, employment and production in country A are also less than that in country B. Hence, it is implied that country A is experiencing an economic recession ac compared to country B as recession means fall in income, production, employment and hence demand. Recession is a temporary phenomenon in an business cycle that takes place due to fall in production, investment, income and demand in a country. As country A is experiencing a reduction, so it can be said that country A is likely undergoing a period of recession (Hutchinson 2015).         

Year

GDP at constant prices(Billion)AUD

Growth rate

Growth rate (%) of real GDP

1980

             544,944,000,000.00

1981

             563,244,000,000.00

0.034

3%

1982

             581,951,000,000.00

0.033

3%

1983

             568,970,000,000.00

-0.022

-2%

1984

             595,297,000,000.00

0.046

5%

1985

             626,547,000,000.00

0.052

5%

1986

             652,245,000,000.00

0.041

4%

1987

             669,037,000,000.00

0.026

3%

1988

             707,634,000,000.00

0.058

6%

1989

             735,081,000,000.00

0.039

4%

1990

             761,023,000,000.00

0.035

4%

1991

             758,132,000,000.00

-0.004

0%

1992

             761,157,000,000.00

0.004

0%

1993

             792,061,000,000.00

0.041

4%

1994

             824,044,000,000.00

0.040

4%

1995

             856,009,000,000.00

0.039

4%

1996

             889,814,000,000.00

0.039

4%

1997

             924,938,000,000.00

0.039

4%

1998

             965,989,000,000.00

0.044

4%

1999

         1,014,357,000,000.00

0.050

5%

2000

         1,053,599,000,000.00

0.039

4%

2001

         1,073,927,000,000.00

0.019

2%

2002

         1,115,345,000,000.00

0.039

4%

2003

         1,149,595,000,000.00

0.031

3%

2004

         1,197,296,000,000.00

0.041

4%

2005

         1,235,689,000,000.00

0.032

3%

2006

         1,272,548,000,000.00

0.030

3%

2007

         1,320,366,000,000.00

0.038

4%

2008

         1,369,308,000,000.00

0.037

4%

2009

         1,394,225,000,000.00

0.018

2%

2010

         1,422,363,000,000.00

0.020

2%

2011

         1,456,209,000,000.00

0.024

2%

2012

         1,509,109,000,000.00

0.036

4%

2013

         1,545,932,000,000.00

0.024

2%

2014

         1,584,578,000,000.00

0.025

2%

2015

 $      1,584,578,000,000.00

0.000

0%

Interpreting GDP Results for Country A and Country B

Table 1: Growth rate of Real GDP of Australia from 1980-2015

Source: Author

Growth rate of Real GDP of Australia from 1980-2015

Figure 1: Growth rate of Real GDP of Australia from 1980-2015

Source: Author

Figure 1 depicts the growth rate of real GDP in Australia from the period 1980 to 2015. The growth rate has varied from -2% to 6% in a span of 35 years. The lowest was in the year 1983 and the highest was in the year 1988. There are steep fall and rise in the growth rate over the years (Tucker 2016). The economy of Australia experienced two major period of fall in the growth rate, one was in 1983, as -2% and other was in 1991, as 0%. The reason behind 1983 negative growth rate was the double-dip severe global recession in the early 1980s was mainly due to contractionary monetary policy of Federal Reserve, USA. The tightening of monetary policy was mainly to recover from the energy crises in 1979 in the world. Australia and USA are good trade partners in the world, so recession in USA had drastically affected Australia’s growth rate and reduced it to negative return (Kent 2014).

The zero growth rates in 1991 in Australia was due to the worst hit recession in the country during early 1990s after the Great Depression. There has been lots of debate behind the actual reason of recession in 1990.One of the belief is the financial excess in the 1980s has caused the recession in 1990s. The international recession in 1990s and the overstretched economy of Australia during the late 80s for achieving faster growth and development may have caused the recession in1992 in Australia (Hasan et al. 2012).

One of the highest growth was 6% in 1988 was mainly due to the overstretched economy of Australia and the rising asset prices in the world market which was followed by increasing borrowing. The economy was going through boom period during 1988, however it was a short-lived boom period and soon economy feel and growth rate got zero in 1992. Another dip in the growth rate was seen in 2009 to 2% due to sub-prime loss in USA which caused global recession. However, it should be noted that after every recession the economy has come out with better growth rates in the next coming years and had always recovered steeply from the recession (Garnier et al. 2015)

Presently, from 2012 onwards the economy is seeing a fall in the growth rate mainly due to fall in the productivity of labour force, income and demand and increase in population due to increase in immigrants with easier immigrant policies (Gandolfo 2013)

Year

CPI

Growth rate

Growth rate of inflation(%)

1980

10.12658

1981

9.691745

-0.043

-4%

1982

11.14551

0.150

15%

1983

10.11356

-0.093

-9%

1984

3.950185

-0.609

-61%

1985

6.739049

0.706

71%

1986

9.084532

0.348

35%

1987

8.488746

-0.066

-7%

1988

7.231772

-0.148

-15%

1989

7.559425

0.045

5%

1990

7.27226

-0.038

-4%

1991

3.22268

-0.557

-56%

1992

0.985915

-0.694

-69%

1993

1.81311

0.839

84%

1994

1.894977

0.045

5%

1995

4.638136

1.448

145%

1996

2.61242

-0.437

-44%

1997

0.250417

-0.904

-90%

1998

0.853455

2.408

241%

1999

1.465428

0.717

72%

2000

4.475183

2.054

205%

2001

4.380841

-0.021

-2%

2002

3.003171

-0.314

-31%

2003

2.770735

-0.077

-8%

2004

2.343612

-0.154

-15%

2005

2.668733

0.139

14%

2006

3.538487

0.326

33%

2007

2.332362

-0.341

-34%

2008

4.352643

0.866

87%

2009

1.820112

-0.582

-58%

2010

2.845226

0.563

56%

2011

3.30385

0.161

16%

2012

1.76278

-0.466

-47%

2013

2.449889

0.390

39%

2014

2.487923

0.016

2%

2015

1.508367

-0.394

-39%

Table2: Growth rate of inflation in Australia fro 1980-2015

Source: Author

Growth rate of inflation in Australia for 1980-2015

Figure 2: Growth rate of inflation in Australia for 1980-2015

Source: Author

Figure 2 shows the growth rate movement of inflation in Australia from 10980-2015. It can be noted that during the boom period when real GDP was high, growth rate of inflation was very high and during recession when growth rate of real GDP was low, growth rate of inflation was very low (Edgar 2014).

Analyzing the Relationship Between GDP and Price Level

Growth rate of inflation and real GDP in Australia for 1980-2015

Figure 3: Growth rate of inflation and real GDP in Australia for 1980-2015

Source: Author

The relation between growth rate of inflation and real GDP is shown in figure 3. The variation in real GDP is much lower than the variation in inflation. The relation between real GDP and inflation growth rate  is positive to each other, When GDP growth rate is high, inflation is also high and when GDP growth rate is low, inflation is also low. The reason is during high growth rate, production, income, employment and demand increases that cause the prices also to rise due to the time lag between demand and production (Storm and Naastepad 2012). The demand can rise instantly, but to meet that excess demand production cannot be increased instantly. It can only increase in the next period and that period rise in demand is met by inventories which are generally of limited nature. Hence inflation increases with increase in real GDP in Australia (Dornbusch and Bodman 2013)

Year

Unemployment rate

Growth rate of unemployment rate

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

9.6

1992

10.8

0.12

1993

10.9

0.01

1994

9.7

-0.11

1995

8.5

-0.12

1996

8.5

0.00

1997

8.5

0.00

1998

7.7

-0.09

1999

6.9

-0.10

2000

6.3

-0.09

2001

6.8

0.08

2002

6.4

-0.06

2003

5.9

-0.08

2004

5.4

-0.08

2005

5

-0.07

2006

4.8

-0.04

2007

4.4

-0.08

2008

4.2

-0.05

2009

5.6

0.33

2010

5.2

-0.07

2011

5.1

-0.02

2012

5.2

0.02

2013

5.7

0.10

2014

6

0.05

2015

Table 3: Growth rate of unemployment in Australia from 1980-2015

Source: Author

Growth rate of unemployment in Australia from 1980-2015

Figure 3: Growth rate of unemployment in Australia from 1980-2015

Source: Author

Figure 3 shows growth rate of unemployment in Australia from the period 1980 to 2015. The country has seen highest unemployment rate in 1993 to 10.9% and lowest in 2008 to 4.2%. There have been several variations in the unemployment rate in between the periods. The variation in unemployment rate is linked with the variation in the growth and development of the country. The highest unemployment rate in 1993 was may be due to the global recession of 1990 which has affected almost all the developed economy. The major cause of recession was contractionary monetary policy of Federal Reserve of United States (worldbank.org 2016).

Growth rate of unemployment and real GDP in Australia from 1980-2015

Figure 4: Growth rate of unemployment and real GDP in Australia from 1980-2015

Source: Author

Figure 4 shows the relation between the growth rate of unemployment rate and real GDP in Australia from 1980 to 2015. The growth rate of real GDP ranges between 2% to 6% in the period of 35 years. The two curves are inversely related to each other. When the growth rate is high, there is more production, investment, employment and income in the economy and so unemployment rate is low. On the contrary, when the growth rate is low, there is less production, investment, employment and income, due to which the growth rate in unemployment is high ( Argy and Nevile 2016).

The unemployment rate gets influenced with seasonal changes in jobs and changes in the business cycle of an economy. The higher unemployment rate may be a short term phenomenon and in long run the unemployment rate reduces due to prudence policies of government towards economic growth and development (Wray 2015). Several steps taken by Australian government towards the reduction in unemployment rate are easy access to foreign direct investment for expansion of job opportunities for the labour force. Further, unemployment beneficial allowances are provided by the government for the labour force to support them in time of financial crises. The government of Australia has given several loan advances facilities for small business organization and farmers to expand their business and grow in their field of work. Hence unemployment problem has been controlled by the government through various measures over the period ( Argy 2013).

References

Argy, V., 2013. International macroeconomics: theory and policy. Routledge.

Argy, V.E. and Nevile, J. eds., 2016. Inflation and Unemployment: Theory, Experience and Policy Making. Routledge.

Data.worldbank.org. (2016). Indicators | Data. [online] Available at: https://data.worldbank.org/indicator [Accessed 29 May 2016].

Dornbusch, R. and Bodman, P., 2013. Macroeconomics 3e. McGraw-Hill Education Australia.

Edgar, B., 2014. An intergenerational model of spatial assimilation in Sydney and Melbourne, Australia. Journal of Ethnic and Migration Studies, 40(3), pp.363-383.

Gandolfo, G., 2013. International Economics II: International Monetary Theory and Open-Economy Macroeconomics. Springer Science & Business Media.

Garnier, C., Mertens, E. and Nelson, E., 2015. Trend inflation in advanced economies. International Journal of Central Banking, 11(4), pp.65-136.

Hasan, R., Mitra, D., Ranjan, P. and Ahsan, R.N., 2012. Trade liberalization and unemployment: Theory and evidence from India. Journal of Development Economics, 97(2), pp.269-280.

Hutchinson, D., 2015. Australian current GDP, GDP deflator, CPI, population and share price index: data sources and methods.

Kent, C., 2014. The Business Cycle in Australia. Address to the Australian Business Economists, Sydney, 13.

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

Mankiw, N.G.R.E.G.O.R.Y., 2014. Principles of macroeconomics. Cengage Learning.

Miles, D., Scott, A. and Breedon, F., 2012. Macroeconomics: understanding the global economy. John Wiley & Sons.

Storm, S. and Naastepad, C.W.M., 2012. Macroeconomics beyond the NAIRU. Economics Books.

Tucker, I.B., 2016. Macroeconomics for today. Nelson Education.

Vespignani, J.L., 2013. The Industrial Impact of Monetary Shocks During the Inflationâ€ÂTargeting Era in Australia. Australian Economic History Review, 53(1), pp.47-71.

Wray, L.R., 2015. Modern money theory: A primer on macroeconomics for sovereign monetary systems. Palgrave Macmillan.    

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