Gross Domestic Product Economy

Question: Discuss about the Gross Domestic Product Economy. Answer: Introduction The Gross Domestic Product (GDP) of a country is defined as the final monetary value of all the goods and services produced within the boundaries of the country in a given financial year. (Mankiw, 2006) The GDP of a closed economy is mainly composed of private consumption expenditures, private and public investments and government expenditures. (Dornbusch, Fischer and Startz, 2010) However, when a country is expose to the global forum, that is, when a country is involved in international trade, the GDP along with the other components also includes the net exports. (Krugman, 2007) Exports which add to the national income of a country are added to the GDP whereas imports which represent an outflow of income are deducted from the national income, that is, the GDP. Hence, we consider the net exports in the GDP calculation. (Blanchard,2007 ) The GDP is an indicator of the economic growth and the standard of living of a country. (Case and Fair, 2006), (Blanchard, 2006) GDP is the most important measure in evaluating the economic performance of a country. The growth of GDP reflects the economic growth rate of a country. The GDP is hence an indicator of the economic progress of a country. As and when the GDP grows, the output in the economy expands. In financial terms, this implies an increase in the income of the people which is turn boosts both consumption and investment demand and the cycle continues. The economy develops gradually through this process. Once an economy is exposed to international trade, the aggregate demand receives a boost from the demand for exports. When a country can engage in trade, it can export the products in which it has comparative cost advantage and import the commodities that are relatively costlier to produce in the domestic economy. This process as a whole affects the GDP of the economy positively. It also provides prospects of economic growth and development. Per capita GDP on the other hand reflects the standard of living of a country. With increases in the GDP and with the population remaining constant, the per capita GDP increases. This implies an improved standard of living in the economy and an implicit increase in the overall welfare. The growth rate of GDP represents the economic growth rate of a country. Thus GDP is the true economic measure of the growth and partly the development of an economy. (Barro and Martin, 2006) The Australian economy is a mixed market economy and it is one of the largest in the world. Service sector is the most important industry in the economy contributing the maximum proportion of GDP. (Scutt, 2016) In addition to that, the mining and agricultural sectors being the export sectors of the economy largely influence economic growth. Before the Global Financial crisis, the growth was considerably around 3.4% in the Australian Economy. The international financial turmoil affected the economy and henceforth the economic growth or the GDP growth rate of Australia has remained approximate 2.5% over the past years. However, in 2012, Australia experienced a rapid rise in the economic growth to 3.5%. Higher terms of trade and rising demand for the export of raw materials over the years have played a major role in the dynamics of the Australian economy. The rising purchasing power of households has led to increased investments especially in the mining sector. However, manufacturing ou tput has been decreasing over the last few years. The main contributors to economic growth are the mining sectors and the services sector. (Mulligan, 2016) The current economic growth rate is 3.1%. Inflation is about 1% with the cash rate being around 1.5%. The unemployment rate is about 5.8%. (Scutt, 2016) The relative contribution of the sectors can be shown as follows: SECTOR CONTRIBUTION IN GDP (%) SERVICES 58 CONSTRUCTION 9 MINING 7 MANUFACTURING 7 RETAIL TRADE 5 GDP (Comparing Australia and China) China is a socialist market economy. It has recorded the fastest growth rate in the world of around 10% for over three decades. The major contributor in the national income is the public sector and the private sector has a very minimum role to play in the economy. (Vawani,2016) China is known for its manufacturing sector which is the largest in the world and accounts for the exports of the economy. (Magnier, 2016) To compare the GDP of Australia to that of China, the GDP figures, the growth rate of GDP and the per capita GDP is taken into consideration. The GDP (PPP, constant 2011 international $) of Australia and China from 2010 to 2014 is shown as follows: TABLE 1 (GDP) YEAR / COUNTRY AUSTRALIA CHINA 2010 911304031484 12613890833917 2011 932989069867 13810256092313 2012 966881953234 14880592037847 2013 990474347265 16023988452379 2014 1015234732343 17188685792266 The GDP of Australia and China can be compared with the following column diagram: CHART 1 As can be seen from Chart 1, there is a huge scale difference between the GDP of the two countries considered. While the GDP figure of China has ranged around 8 to 9 trillion USD over the years with a very prominent growing trend, the GDP of Australia is around 1.5 trillion USD. Thus Chinas GDP is almost 6 times that of Australia and this figure has been consistent over the period of five years considered. The following table represents the GDP growth rates (annual %) of Australia and China over 2010-2014: TABLE 2 (GDP GROWTH RATE, %) YEAR / COUNTRY AUSTRALIA CHINA 2010 2.0182 10.632 2011 2.3796 9.4845 2012 3.6327 7.7503 2013 2.44 7.6838 2014 2.4999 7.2685 Table 2 shows that while the growth rate of China has started from 10% and has reduced to 7% in the recent years, the growth rate of Australia has been almost four times less than that of China at around 2-3% over the years concerned. This is illustrated with the following line graph: CHART 2 As is evident from Chart 2, the growth rate of China has fallen in the time period concerned. However, in spite of that, the growth rate has been much more than that of Australia. The latter has registered a growing GDP from 2010 to 2012 after which it has slightly fallen to become constant in the recent years. This huge difference in the growth rates of the two countries is indicative of the difference in their respective economic progress controlling for other factors. Compared to China, Australia seems to be growing at a much slower pace. The following table represents the per capita GDP (PPP, constant 2011 international $) of Australia and Chine from 2010 to 2014: TABLE 3 (Per Capita Gdp) YEAR / COUNTRY AUSTRALIA CHINA 2010 41363.22 9429.501 2011 41763.12 10274.49 2012 42540.97 11016.99 2013 42845.49 11805.09 2014 43256.48 12599.18 As Table 3 shows, the per capita GDP of Australia is much more than that of China. This is represented in the following chart: CHART 3 As represented by the column diagram in Chart 3, the per capita GDP of China is much lower than that of Australia. Though the overall GDP of China records much higher figures, the per capita GDP reflects quite the opposite. The main reason behind this is the huge population of China compared to which the population of Australia is much less. Hence when the total GDP gets divided among the entire population, the resulting per capita GDP becomes much lower. The population of the two countries is shown in the following table: TABLE 4 (Population) YEAR / COUNTRY AUSTRALIA CHINA 2010 22031750 1337705000 2011 22340024 1344130000 2012 22728254 1350695000 2013 23117353 1357380000 2014 23470118 1364270000 The following column diagram compares the population of the two countries over the period concerned: CHART 4 As is evident from Chart 4, the population of China is way more than that of Australia. The difference is so huge that the columns for Australia are almost not visible in comparison to those of China. This is the reason why the per capita income in China is much less than that of Australia. Thus, even though the economic growth of China exceeds that of Australia by a huge margin, the per capita income is much less which is indicative of a much lower standard of living in China than in Australia in spite of the rapid economic development. However, in the recent years, the population in China has decreased due to various population control measures adopted by the Chinese government. That is why the per capita GDP has been increasing in the recent years. But it will take a considerable span of time to increase the per capita GDP in China because population control measures are the most effective in the very long run. (Lee, 2016) , (Walker, 2016) The growth rate of per capita GDP (annual %) in Australia and China is shown in the following table: Table 5 (Per Capita Gdp Growth Rate, %) YEAR / COUNTRY AUSTRALIA CHINA 2010 0.443578 10.09869 2011 0.966807 8.961165 2012 1.86253 7.226582 2013 0.715833 7.153475 2014 0.959239 6.726721 The growth rate of per capita GDP is shown in the following diagram: CHART 5 The growth rate of per capita GDP is much more in China, that is, it is almost 10 times as much as that in Australia. There may be different reasons for this behaviour of the per capita GDP. The GDP growth rate and the population growth rate in Australia have been consistent over the years. Hence the per capita GDP growth rate is not as much in Australia. However, for China, the GDP has been growing drastically, whereas the population growth rate has been controlled due to various measures adopted by the government. Thus, the per capita GDP growth rate registers high figures. From 2010 to 2012, the per capita GDP in China has been falling while that in Australia has been rising. After that, the per capita GDP in China has almost become constant while that of Australia has initially fallen and then become constant. (Downes, Hanslow and Tulip, 2014) Thus, the economic growth rate of China is much more than that of Australia. However, the standard of living, as measured by the per capita GDP is much less in China as compared to Australia. The cause of this divergence is the huge population of China. (Jun, 2013), (Scutt, 2016) Factors Affecting the GDP of Australia One of the main factors influencing the GDP growth rate in the Australian economy is the consistent employment generation that has taken place in the economy over the past few years. As new jobs are created, more and more people get employed. This in turn leads to the increase in output from the supply side. (Wilkie and McDonald, 2008) Again, when these people start earning or earning more than they were earning earlier, their consumption and investment demand increase. This boosts up the aggregate demand and hence augments economic growth from the demand side as well. The reduction in unemployment in the Australian economy is one such evidence in favour of the GDP growth being a result of job creation. On the flip side, when unemployment increases, the GDP growth slows down from both the supply side and the demand side of the economy. Thus employment or unemployment is a major factor affecting the GDP of Australia. (Mulligan, 2016) Commodity prices is another component of the GDP that influences the GDP to a great extent. Australia being an exporter of mining and agricultural products, faces international prices with respect to the same. As prices of these commodities fall in the international market, it negatively affects the export sector thereby hindering the GDP growth. On the other hand, demand for exports also rise when prices fall. So the ultimate effect on GDP is determined by the relative changes in prices and demand, that is, the price elasticity of demand. Over the past decade, Australia has experienced a steep increase in the terms of trade mainly due to increase in demand for iron ore and coking coal from China. (Scutt, 2016) Wage growth is also an important factor in determining the GDP. As wages grow, the GDP increases because of a demand side boost that increases the aggregate demand. However, rising wages also translate into rising prices and this may pull down demand. The end result again depends on the relative effects. (Mulligan, 2016) Investment is a primary determinant of GDP. The Australian economy mainly acquires investment in the mining sector. However, rising confidence in the non-mining sectors giving way to rising investment can uplift the economy to a great extent. Credit growth in the business sector of Australia has increased which is a positive sign for the economy. (Downes, Manslow and Tulip, 2014) Various fiscal and monetary policies adopted by the government of Australia influences the growth rate. Economic shocks have also a considerable role to play. However, the booming mining sector absorbs the business cycle shocks protecting the economy from vulnerability. An instance of this is the flexibility reflected by the Australian economy during the Global Financial Crisis because the shock was absorbed mostly by the mining sector. (Mulligan, 2016) Factors Affecting the GDP Of China After the market reforms of 1978, China moved from a centrally planned economy to a market-based economy. Since then, it has experienced tremendous social as well as economic development. The average GDP growth rate is almost 10 percent per annum which is a remarkable number in itself. This growth has moreover been sustained by the Chinese economy over the years, which is the first of its kind in the history of the world. More than 800 million people have been driven out of the poverty as a consequence of this rapid progress. By 2015, China attained all the Millennium Development Goals (MDGs). It is currently the second largest economy in the world and contributes significantly to the global economy. China economy is a large exporter of cheap substitute electronics and other kinds of commodities like apparel, textiles, medical instruments and iron and steel in the world market. Trade is thus an important determinant of the GDP of China. (Peston, 2015) In a booming Chinese economy, foreign and domestic investment has been a major contributor to the growth of GDP. Labour abundance arising out of the huge population of China has contributed to the production of the many labour-intensive commodities that the economy produces for the domestic market as well as in the global markets. (Walker, 2015) Thus population growth which however has recently been checked is also an important contributor of the GDP. However, it is still a developing country with incomplete market reforms. Rapid growth and development have been accompanied by rising inequality, issues of environmental sustainability, urbanization and external imbalances. China is the largest manufacturing exporter on the global trade forum. (Assbring, 2012) The manufacturing sector plays a very important role in determining the GDP of the economy. However, China also imports various inputs like iron ore, etc. in huge volumes. The trade sector thus greatly affects the GDP. One major factor that has adverse as well as positive effects on the GDP of China is the population of the economy. (Schreurs, 2014) The reduction in the per capita income of the economy is a result of the huge population. This leads to a deterioration in the overall standard of living. The one-child policy that has lately been adopted by the Chinese government is a strategy towards reducing the population growth. (Samuelson and Nordhaus, 2014) Though the effectiveness of the policy will be delayed, in the future, this will lead to a considerable improvement in the GDP growth. Thus, the overall economic performance of the Chinese economy has been consistent and better over the years . (Vaswani, 2016) Conclusion Australia is an exporter of mining and agricultural commodities. On the international forum, the economy has experienced considerable export boom. International trade being a primary GDP component affects the GDP figures of the country. The mining industry of Australia is presumably the most efficient in the world and persistent growth in this sector contributes to the growing GDP of the economy. In addition to that, real estate investments in certain parts of the country have shown successful prospects over the past few years. Labour productivity is also an important factor that the country has an advantage over and which helps the GDP grow. Thus, Australia has been performing well over the past years except for occasional fluctuations in certain macroeconomic variables. On the other hand, the Chinese economy has progressed rapidly over the past few years because of the proper implementation of reforms and appropriate policies. The population growth has been considerably checked to support economic growth. Moreover, the country has made a remarkable progress in the international trade forum. It is a very important entity in the global trade framework contributing a major part of world exports. 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