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## What is GDP and how is it calculated?

Write an essay on Gross Domestic Product.

Gross Domestic Product a measure  of the wealth  of a country. It is calculated as  thef final value  goods and services produced in a country . some of the elements calculated  on are  GDP are investment; government expenditure;  consumption by private individuals  and exports less imports.,thus total  GDP= Investment + Government Expenditure  + Consumption  + [Export  – Import)  .

The purchases made by government are the government expenditure. The transfer payment is not considered as a component of GDP. This is because; it is a one-way transfer of money and involves on exchange of goods and services (Hubbard, 2009). This implies that this money does not create any value to the production of the country. It is generally measured annually to observe the annual change in an economy Therefore, from the given data, the transfer payment will not be taken into account while calculating the GDP of the country A and B.

We can evaluate the economies of the two countries given the data . the GDP of the two countries are however equal, thus we have two analyze the different components of the GDP.In the given data of two countries, the values of each component are same.Acquisition value of fixed assets is represented by Gross Fixed Capital Expenditure .. However, improvement in the value of land is considered as fixed capital expenditure. Fixed capital increase in an economy indicate a vibrant phase in the economy. Therefore, when the fixed capital expenditure is increased then the country is in a prosperous condition and this in turn will further increase the  fixed capital expenditure. Patterns of consumption and investment play a key role in the economy of a country. countries that consume most of their income as the United States, tend to invest relatively little and show a moderate rate of economic growth, whereas those who consume a small portion of their income tend to invest much (Pissarides, 2000). We try to understand how individuals choose between saving and consumption and see because the poor tend to save less than the rich.

also we study the determinants of investment, including factors such as taxes are, times of interest and expectations. Hence, recession phase is indicated when the gross fixed capital expenditure declines. As shown in the given data country B has a higher gross fixed capital expenditure as compared to country A, thus it can be concluded that country B is doing better economically as compared to country A.

## Components of GDP

With regards to inventory changes indicate final good demand changes. When there is an increase in inventory , it indicates that final goods demands has fallen and vice versa. Thus there will be less production of goods by the manufacturese to let the inventory clear first. Country B inventory is negative , which represents high demand for the goods as the goods are getting cleared, which indicates a vibrant economy in country B, On the other hand, country A’s inventory is accumulating, which means that the people are not consuming goods to clear, hence the lack of demand and the country’s economy is not doing well. Hence, country A is most likely to be falling into a recession.

Real GDP is the production of final goods and services produced within a country but at constant prices, ie real GDP eliminates price changes over the years, while nominal GDP or current prices does reflect these annual changes, either increases (inflation) or decreases (deflation).GDP at constant prices is calculated from the prices of a year taken as a base and can therefore isolate the changes brought on prices. As a result, this measure gives us the possibility to compare the actual production of a given country at different periods of time.Although real GDP growth does not pick up the technological changes that constantly modify the characteristics of the goods and services produced by an economy is however the best way to calculate the economic growth of a nation. Hence the real GDP growth provides the best information on the growth of an economy.

Real GDP growth rate=real GDP in period n- real GDP in period (n-1)

Real GDP in period (n-1)

 Year Real GDP (Constant 2005 \$US) Real GDP Growth Rate 1980 305,649,174,623 - 1981 315,913,311,664 3.36 1982 326,405,727,600 3.32 1983 319,124,920,882 -2.23 1984 333,891,256,176 4.63 1985 351,418,812,598 5.25 1986 365,832,353,236 4.10 1987 375,250,680,515 2.57 1988 396,899,035,562 5.77 1989 412,293,558,478 3.88 1990 426,843,954,277 3.53 1991 425,222,444,977 -0.38 1992 426,919,112,438 0.40 1993 444,252,603,756 4.06 1994 462,191,286,542 4.04 1995 480,119,873,455 3.88 1996 499,080,482,890 3.95 1997 518,780,895,427 3.95 1998 541,805,654,425 4.44 1999 568,934,385,594 5.01 2000 590,944,509,406 3.87 2001 602,346,114,749 1.93 2002 625,576,717,369 3.86 2003 644,786,919,208 3.07 2004 671,541,542,213 4.15 2005 693,075,477,372 3.21 2006 713,749,019,841 2.98 2007 740,569,266,017 3.76 2008 768,019,943,343 3.71 2009 781,995,435,291 1.82 2010 797,777,527,534 2.02 2011 816,761,133,123 2.38 2012 846,431,780,635 3.63 2013 867,085,131,359 2.44 2014 888,760,969,615 2.50

Inflation is calculated using the formulae below

Inflation rate=CPI of Period (N)- CPI of period(N-1) * 100

CPI of Period (N-1)

In this paper, we shall analyse Australia GDP growth and compare it with the inflation rate for Australia from the year 1980 through to 2015. We shall be seeking to establish what was the change in GDP growth rate in various inflation rates in this economy and the policies that would have been implemented to change the situation.

The CPI is the most widely used index to analyze the evolution of prices. Quantifies the trajectory of prices of a basket of goods and services that are considered representative of the average consumption pattern of households (Berlatsky, 2013).

There was a contraction of the economy in 1983 and also 1991, the contraction was attribute to many factors including slow manufacturing of exports due to recession. The negative growth rate in the economy for the year 1983 and 1991 portray an economy that is struggling. During this period 1982 and 18983 there was  high inflation some of which were the highest to be recorded in the country of more than 10%. However, as the data shows Australia’s GDP has been growing steadily over the last two decades. Due to the high inflation especially in 1982 and 1983 we can see that the GDP growth rate recorded was negative. In early 1980s this country was deregulated and liberalized (Borjas, 2005).. This meant that inflation generated the contraction of the economy to \$319,124,920,882 in 1984.  There was also recession between the year 1992 – 1993 a period in which the GDP stagnated , as observed also, during this period inflation rose to 8% from an average of 6.8% in 1990 indicating that there is a direct relationship between inflation and GDP in this country.

## Relationship between GDP and inflation

In 1998, when inflation was at a record low of – 0.15, the Australian economy  recorded one of the highest growth rate of over 5%.  However, policy makers in the country can be lauded for managing to keep the inflation rates over the yaers at minimal rates.  For a country to ensure that its economy grows it must ensure that inflation rates are at minimum levels. During the global financial crisis Australia’s economy was not left behind , there was adverse effects to the economy.  one of them was  a high inflation although the economy managed to record a growth rate of 3.71% in that year, the iflation rate rose to 4.27%. the graph shows  that when the growth rate slope is positive the inflation rate is negative which represents an inverse relationship between the two indicators.

Economic growth is negatively affected by high inflation rate or a rise in inflation. The inflation rate measures the growth in the general level of prices..These indices are studying the average change in prices of a list of products representative of the families of a country, which is known as "shopping cart" and set their rate of change in annual terms based on the monthly price controls .A situation of price stability occurs when, on average and in the medium term, prices or rise or fall significantly.The general price level is stable when an individual can buy with your salary a set of goods and services like year to year.Most banks estimate that inflation rates should remain positive but below 3% in the medium term.

Inflation occurs when the purchasing power of a currency decreases, to the extent that the amount of circulating currency is above the real demand.In other words, when the money supply grows at a rate higher than the growth rate of money demand.The causes of inflation are usually multiple, and some of them may be:Monetization of government deficitsWhen a government has fiscal deficit, often used to finance its deficit through a borrowing or by issuing currency.An expansionary monetary policy (Canterbery, 2011).

The reseve bank of Australia  decides to increase the money supply to stimulate production. However, if the demand for money or production does not grow along with the offer, you can generate inflation inflation can also be attributed to high demand inflation  demand for goods and services in an economy is greater than the supply thereof.The productive capacity can not increase at the same pace with the growing demand for goods, and an inflationary pressure is created.Cost inflationThe prices of final products increased by costs incurred in production, whether costs of labor, raw materials, machinery, services, etc.Structural inflationThe production structure of a country can produce an increase in prices. A particular sector, for example, can trigger increased prices to the rest of the economy.

## Relationship between GDP and economic growth in Australia

If the cost of production is high, the firm has less incentive to produce goods and services at the same price. hence, they would charge a higher price. This will in turn increase the inflation rate. As the price level gets higher the less demand will be created, which will lead to fall in aggregate demand and producer will reduce its production. Therefore, rise in inflation leads to fall in GDP, that causes growth rate to fall. Moreover, the high inflation rate occurs due to high wage of the labors. However, as much as we want to say that rise in infalation negatively affects the GDP growth , it it important to note that when inflation is very low or negative producers  may be discouraged to produce hence hampering economic growth.  There unemployment is the situation where people are taking age, ability and desire to work do not take or can get a job. It is an involuntary idleness of a person who wants to find work. A person is unemployed when it meets four conditions: (1) is of working age, (2) have no work, (3) is looking for work, and (4) is available to work.In this vein unemployment is an involuntary phenomenon, both on individuals and on the side of the companies, ie people who want to be employed are not employed and companies, as there is unemployment, receive income that would be possible if there were full employment or unemployment is lower (Hotchkiss, 2003). Australia, is one of the worlds most developed countries. But you find that it is hard to absorb the entire workforce (all who wish to work).

Unemployment is calculated using the following method

Unemployment rate = unemployed / Workforce * 100

Unemployment Rate and Growth Rate of Australia

 Year Unemployment Rate Real GDP Growth Rate 1980 6.21 - 1981 6.04 3.36 1982 6.66 3.32 1983 10.42 -2.23 1984 9.72 4.63 1985 9.18 5.25 1986 8.45 4.10 1987 8.97 2.57 1988 8.02 5.77 1989 6.67 3.88 1990 6.51 3.53 1991 9.59 -0.38 1992 10.90 0.40 1993 11.28 4.06 1994 10.78 4.04 1995 9.01 3.88 1996 8.80 3.95 1997 8.98 3.95 1998 8.22 4.44 1999 7.35 5.01 2000 6.88 3.87 2001 6.77 1.93 2002 6.74 3.86 2003 6.43 3.07 2004 5.71 4.15 2005 5.44 3.21 2006 5.12 2.98 2007 4.71 3.76 2008 4.30 3.71 2009 6.04 1.82 2010 5.75 2.02 2011 5.23 2.38 2012 5.50 3.63 2013 5.96 2.44 2014 6.23 2.50 2015 6.47 -

Source: Databank.worldbank.org 2016

In this section we shall be analysing Australia unemployment rate history from 1980 through to 2015 and relating the unemployment rate with the GDP growth rate of the country from the above table.

As the economy grows, unemployment rate drops, Australia has experienced two major recession phases which are 1983 and 1991, 1992 and 1993. Looking at the table, it is not suprising to see that this are the periods that recorded highest unemployment rates ever.  In 1993, real GDP growth fell by -2.23% which resulted to an unemployment rate of 10.42%. in 1991 and 1992, the economy slumped by -0.38% and 0.40% respectively. Subsequently, unemployment rate rose to 9.29% and 10.9%  respectively.  On the other hand, it is clear to see that in 2006, when GDP grew by 2.98% unemployment was 5.12%. in 2007, GDP grew by 3.76% consequently, unemployment droped by 4.71%.  this suggests that when the economy grows there are more jobs created thus the relationship between unemployment and GDP growth is inverse.

However, it is  worth to note that in despite a  fall in the growth rate, the unemployment rate is still falling. This happens because of flexible labor market and flexible wages awarded. Moreover, when the production falls, the firms do not reduce their number of workers employed; rather they reduce the number of working hours. Due to flexibility in the labor market the wage of labors are not rigid in nature. As a result of this, the wage is being reduced instead of the numbers of workers involved another reason for this is The fall in growth rate may also occur due to diminishing marginal returns.

The government of Australia should put in place fiscal measure that ensure that unemployment in the country is tackled since as it emerges unemployment is on the rise. To improve the situation of the economies and, therefore, employment, governments should not intervene in the business side of economies. That is, companies should not ride or take them private and much less rescue one that is failing. Some of the measures are through reductions of taxes and provision of subsidies to emable those sectors create jobs for the people. the first step to reduce unemployment is to let the private sector take precedence over the public sector in business terms.

The role of governments in business regulation should be limited to activities to protect consumers and workers against exploitation and to establish bases of equal competition. Investing in basic services, especially in education, very important, and little else.Job creation comes from companies that invest and create. Governments will only hinder when they take private resources and artificially create jobs in the long run, and not so long, impoverishes the economy. The Australian government should therefore create an enabling macro economic environment to enable investors create jobs through creating good fiscal and monetary policies that ensure that there will be creation of jobs  within the economy.. This is one of the most efficient ways of ensuring that there is GDP growth which in turn ensures creation of jobs.

However , Unemployment levels range considerably by changes in the level of movement of the job market , triggered by technological change , which results in change of employment from one  organization to another , from one industry to another and also from one location to another ; additionally also by age , gender and race (Autor, 2009). The overall unemployment level is one of the most commonly to measure the overall economic well-being indicators , however given the dispersion of unemployment , should be considered to be in imperfect indicator of the  wellbeing of people.

 Year Real GDP (Constant 2005 \$US) 1980 305,649,174,623 1981 315,913,311,664 1982 326,405,727,600 1983 319,124,920,882 1984 333,891,256,176 1985 351,418,812,598 1986 365,832,353,236 1987 375,250,680,515 1988 396,899,035,562 1989 412,293,558,478 1990 426,843,954,277 1991 425,222,444,977 1992 426,919,112,438 1993 444,252,603,756 1994 462,191,286,542 1995 480,119,873,455 1996 499,080,482,890 1997 518,780,895,427 1998 541,805,654,425 1999 568,934,385,594 2000 590,944,509,406 2001 602,346,114,749 2002 625,576,717,369 2003 644,786,919,208 2004 671,541,542,213 2005 693,075,477,372 2006 713,749,019,841 2007 740,569,266,017 2008 768,019,943,343 2009 781,995,435,291 2010 797,777,527,534 2011 816,761,133,123 2012 846,431,780,635 2013 867,085,131,359 2014 888,760,969,615

References

Abs.gov.au. (2016). 6401.0 - Consumer Price Index, Australia, Mar 2016. [online] Available at: https://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/6401.0Mar%202016?OpenDocument [Accessed 23 May 2016].

Data.worldbank.org. (2016). Unemployment, total (% of total labor force) | Data | Table. [online] Available at: https://data.worldbank.org/indicator/SL.UEM.TOTL.ZS [Accessed 23 May 2016].

Databank.worldbank.org. (2016). World Development Indicators| World DataBank. [online] Available at: https://databank.worldbank.org/data/reports.aspx?source=world-development-indicators [Accessed 23 May 2016].

Autor, D. (2009). Studies of labor market intermediation. Chicago: University of Chicago Press.

Berlatsky, N. (2013). Inflation. Detroit, MI: Greenhaven Press.

Borjas, G. (2005). Labor economics. Boston: McGraw-Hill/Irwin.

Cahuc, P., Carcillo, S. and Zylberberg, A. (n.d.). Labor economics.

Canterbery, E. (2011). The global great recession. Singapore: World Scientific.

Dryden, A. (n.d.). The recession.

Flinn, C. (2010). The minimum wage and labor market outcomes. Cambridge, Mass.: MIT Press.

Hotchkiss, J. (2003). The labor market experience of workers with disabilities. Kalamazoo, Mich.: W.E. Upjohn Institute for Employment Research.

Hubbard, R. (2009). Macro economics. Frenchs Forest, N.S.W.: Pearson Prentice Hall.

Krusell, P. and Rudanko, L. (2012). Unions in a frictional labor market. Cambridge, Mass.: National Bureau of Economic Research.

Labor market regional review. (2010). Lincoln, Neb.: Nebraska Dept. of Labor.

Oslington, P. (2006). The theory of international trade and unemployment. Cheltenham, UK: Edward Elgar.

Pissarides, C. (2000). Equilibrium unemployment theory. Cambridge, Mass.: MIT Press.

Pissarides, C. (2000). Equilibrium unemployment theory. Cambridge, Mass.: MIT Press.

Weil, D. (2005). Economic growth. Boston: Addison-Wesley.
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