Comparison Of GDP And Economic Performance Of Australia And Other Developing Countries

Australia’s Economy and GDP

Question:

Compare Australia with any other economy and discuss their GDP last 3 to 5 years and factors affecting their GDP.
 

The main aim of essay is to compare the Australia with other developing countries and discuss their GDP in last 3 to 5 years. The author also discusses the factors affecting their GDP or Gross Domestic Product. The economy of Australia is one of the largest mixed market economies in the world. The Australian economy is mostly dominated by service sector that comprises sixty eight percent of total gross domestic product. The economic growth of the country largely depends on the mining and the agricultural sector. The country is under progressive growth without even facing a single recession in the past twenty five years. The country is abundant in its natural resources and the entrepreneurial skill is also very efficient. As per the World Bank data the economic growth is at 3.0 %. The inflation rate is at 1.3 percent and the unemployment rate is at 5.7 percent. The total wealth of Australia accounts for 6.4 trillion Australian dollar. In 2012 Australia was the twelfth largest national economy in terms of nominal GDP. It is 19^th largest exporter and 19th largest importer in world. The Reserve Bank of Australia is responsible for publishing the quarterly report of the economy of Australia (Austrade.gov.au. 2016). 

GDP is the gross domestic product of the economy that measures the total amount of goods and services produced by the economy at a given time. There are many components that affect the production and consumption of the economy. Gross Domestic Product is the quantitative measure of the nation’s total economic activity. GDP represents the monetary value of the goods and service produced within a nation over a period of time. It is measured quarterly or yearly. It is the measure of all the final goods and services produced in an economy. GDP growth measures the economic performance of the economy (Borio 2014).

The author compares Australia’s GDP growth rate with developing country India to show the differences in the efficiency of the country. The author compares the economic performance of Australia and India. GDP is the sum of the gross value added by all the residents or the producers in an economy. 

Table1: Annual GDP growth rate of Australia.

Year	GDP growth rate in percentage.
2005	3.2 %
2006	3.0 %
2007	3.8 %
2008	3.7 %
2009	1.8 %
2010	2.0 %
2011	2.4 %
2012	3.6 %
2013	2.4 %
2014	2.5 %
2015	2.2 %
2016	3.0 %

The above trend shows that the GDP growth rate in Australia is fluctuating in nature. It is highest in the year 2007 and lowest in 2009. The GDP growth rate increased in the year 2016 that shows that the economic performance of the country is increasing.

Table2: Annual GDP growth rate of India.

Year	GDP growth rate in percentage.
2005	9.3 %
2006	9.3 %
2007	9.8 %
2008	3.9 %
2009	8.5 %
2010	10.3 %
2011	6.6 %
2012	5.1 %
2013	6.9 %
2014	7.3 %
2015	7.5 %
2016	–

The above trend shows that the GDP growth rate India is also fluctuating. It was highest in the year 2010 and lowest in 2008. Currently the GDP growth rate is rising showing that the country is improving.

YEAR	AUSTRALIA GDP GROWTH RATE (%)	INDIA GDP GRWTH RATE (%)
2005	3.2 %	9.3 %
2006	3.0 %	9.3 %
2007	3.8 %	9.8 %
2008	3.7 %	3.9 %
2009	1.8 %	8.5 %
2010	2.0 %	10.3 %
2011	2.4 %	6.6 %
2012	3.6 %	5.1 %
2013	2.4 %	6.9 %
2014	2.5 %	7.3 %
2015	2.2 %	7.5 %
2016	3.0 %

The above comparison shows the GDP growth rate of India is higher than that of Australia. It means that the economic performance of India is better than Australia in terms of GDP growth rate. The monetary values of the products produced in India are higher than that in Australia.  In terms of GDP growth rate India is ranked in 11^th position and Australia is in 13^Th position. The GDP is calculated without making any deductions of depreciation. It includes the taxes and rules out subsidies. The Australian economy is expected to grow at the rate of 2.9 percent between 2016 and 2020 in terms of annual GDP growth rate.  Australia is the world’s 12^th largest economies in the world and has 3.3 percent average GDP growth rate per annum in the year 1992 to 2015. The GDP growth rate in India is greater than that it was expected by the government (Scutt 2016).

Factors Affecting Australia’s GDP

Gross domestic product or GDP is the monetary values of all the final goods and services that are produced in an economy over given time period. GDP includes private consumption, public consumption, investment by business houses and imports and exports. GDP can be calculated as follows:

GDP = C + G + I + NX

Here, C represents the private consumption, G represents the government expenditure, I represent the country’s investment and NX represents the net exports of the country that is exports minus the imports. GDP is used to compare the productivity of different countries. There are two types of GDP basically. One is nominal GDP that does not include the inflation rate and the other is the real GDP growth rate that is the rate after it has been corrected for inflation. The best way to measure the growth of the economy and the standard of living is to take into account the real GDP growth rate that shows the purchasing power of the individuals in an economy (Mankiw 2014)

The output gap is the difference between the actual GDP and potential GDP and is calculated as Y-Y* where Y is the actual output and Y* is the potential output. If the calculation shows a positive number then it means that the aggregate demand is higher than the aggregate supply that indicates rise in inflation. The percentage of GDP can be measured as actual GDP minus potential GDP divided by potential GDP. A positive out gap indicates high demand and a negative output gap indicates low demand.  Demand and supply indicates the level of price and the real GDP.  Aggregate supply indicates the relationship between quantity supplied and the price level and the aggregate demand indicates relationship between demand of goods of real GDP and the price.  As the price level rise the supply of GDP rises and the demand of output falls (Konchitchki and Patatoukas 2014).

Figure: Output gap explained through demand and supply

In the above diagram SAS is the short run aggregate supply, LAS is long run aggregate supply, AD is the aggregate demand and E is the equilibrium level. Y indicates the actual output and Y*is the potential GDP. Price level is measured in Y axis and real GDP in X axis. The gap between Y and Y* shows the potential gap. The country will be at equilibrium level when the aggregate demand is equal to aggregate supply in short run. Here the price level will also be at equilibrium. In short run the economy can produce that amount only for which it has demand. But in long run since the firms now have competitive advantage and economies of scale it can produce more than its potential. The output gap arises because the aggregate demand is low while the supply is high (Goodwin et al. 2013).

When the aggregate demand in the economy rises then the demand curve shifts to its right. The price level rise and so does the real GDP because the short run supply curve remains unchanged. The wage rate now increases due to rise in the price level. The short run aggregate supply curve shifts to its left that increase the price level but the real GDP falls. In long run the potential gap arises because the long run aggregate supply is fixed and is vertical. The long run aggregate supply curve indicates a full employment level. Here the country is assumed to be unemployment free because the producers utilize all the countries resources to produce the goods. The long run equilibrium will be achieved at a level where short run aggregate supply, aggregate demand and long run aggregate supply curve intersect at one common price level. Here the country operates at equilibrium price level and equilibrium output. The economy is said to achieve full employment as explained in the diagram below (Gandolfo 2013).  

Comparison of Australia and India’s GDP Growth Rate

Figure: Full employment level or sustainable GDP level

Stagflation is the condition when the price level rises but the output or the real GDP falls. In such a situation the countries growth is stagnant but the price level is rising. This arises due to fall in the short run aggregate supply and rise in the aggregate demand. The GDP of the country increases with the increase in labor force, capital and improvement in technology. The output gap plays a significant role in policy making and affects the decision of the government (Fraser et al. 2014).

Gross domestic product of a country indicates the standard of living of the country. The analysis conducted and data above shoes that the standard of living of people in India is higher than that in Australia. The mode of measuring GDP is common in all the countries so it makes it easy for the comparison of productivity. GDP is used to measure the value added for various goods and services. GDP is expressed in comparison to the previous year. There are three ways or methods to measure GDP.  These are income approach, production approach and expenditure approach (Egerer et al. 2016).

The production approach estimates the gross value of output added after deducting the value of the intermediate consumption. This is known as the sum of the GDP at factor cost. The second approach to measure GDP is income approach. It is also known as Gross domestic income approach. This method is calculated by taking into account the income that the firms pay to households in form of wages, interest for capital, rent for land and the profits of the entrepreneurs. The GDP is measured after deducting the depreciation cost and indirect taxes. The third approach to calculate GDP is the expenditure approach where the GDP is measured in terms of purchase price of all goods and services except the intermediate goods (Mankiw 2014).

There are four components of GDP that are as follows:

Personal consumption expenditure- this is the largest component of GDP and greatly affects the country’s output. The example of such spending is expenditure on durable goods by consumers, food, jewelry, or daily basis for consumption. When the personal consumption of the country rise the demand for the goods also increase that shifts the demand curve to its right. The real GDP of the country also rises and so does the price level. It can be shown in the following diagram that how the rise in the consumption increase the demand and the GDP (Goodwin et al. 2013).  

Investment- Investment is another component of GDP. Examples of investment are buying of new machines used for the production purpose, purchase of software and other products that yield profit. When the investment in an economy rise then the production in an economy also rises that is the money supply increases in the economy.  So the output also increases that in turn increases the GDP of the country as shown in the above diagram (Goodwin et al. 2013).    

Components of GDP

Government expenditure- expenses that the government makes on the economy for it development also affects the GDP of the economy. Examples of government expenditure are salary paid to government servants, goods purchased for infrastructure development and military expenses. It does not include transfer payment such as social security and unemployment benefits. Increase in government expenditure increases the real GDP of the economy as the aggregate demand now raises that leads to high production (Goodwin et al. 2013).   

Net exports- Net exports that are measured as the export minus the import are another component of GDP. When the export of the country rises more goods are produced in an economy. This leads the real GDP of the country to rise. Imports are not included in real GDP because it is already included in the consumption, investment and government expenditure component (Goodwin et al. 2013). 

The four components of GDP greatly affect the GDP and this in turn affects the growth of the economy.  Changes in the components of GDP can be explained by using the demand curve as shown below. 

Figure: Components of GDP and its affect on real GDP using demand.

There are many factors that affected the GDP growth in Australia. First was the fall in prices of commodities and rise in net exports. In the past ten years the terms of trade in Australia is increasing. The demand for the Australian good in china is increasing that is leading to the rise in the exports of Australia’s products. The commodity prices of the goods are rising. This leads to the boom in investment which ultimately leads the real GDP to rise. The nominal GDP growth per capita is weak in Australia though the overall GDP growth is rising. The export prices are falling. The export boom is increasing the real GDP of the country (Glynn 2016).  Export boom also gives way to investment boom. New industries are starting up leading to increase in demand that is ultimately increasing the GDP growth of the country. The service sector in Australia is the biggest contributor to the GDP growth rate. Mining plays a great role in Australian economy. The export in recent quarter is falling due to rise in the export prices. Despite of the fall in the exports the mining has been the biggest contributor to the GDP growth in Australia. The investment in housing is increasing that is leading the GDP to rise. Private investment in Australia increased. The productivity and efficiency of the workers also contribute to the rise in GDP. If the workers are very efficient then the productivity of the firm rises that leads the production to also rise (Scutt 2016). The stock of inventories is rising in Australia that means that the production is rising but the demand is less. The rise in inventories suggests that the producers forecast that they will be able to sell the goods produced in the coming future. Basically there are two factors that affect the GDP growth. These are the demand and the supply factors. The final consumption expenditure in Australia is increasing when compared to previous year. This indicates that GDP growth is also rising. The government spending is also rising that is leading the Real GDP to also rise. Hence there are many factors that affect the real GDP of the country. GDP shows how well the economy is performing (ABC News. 2016). 

Output Gap and Its Significance

Population growth greatly affects the growth of GDP in India. Human resource and the productivity also affect the GDP growth in the country. If the employee’s skills and knowledge fall then the GDP of the country also falls and vice versa. In India there is mixed group of people both knowledgeable and illiterate. This greatly affects the GDP as the producers are unable to find the right people for the right job. Physical capital is the machines and the assets that are used to produce more of goods and services. Fall in the investment also leads to fall in Real GDP. Entrepreneurship, human resources and literacy rate also greatly affects and influences the GDP growth of the country. The personal household consumption is stable in India that makes the real GDP growth of the country also stable (Radhakrishna and Panda 2012). The government spending is falling that leads to fall in the GDP growth rate in the country. The export of India in April was the minimum that lead to fall in the GDP in recent times. The Chinese investment in India increased by six times that largely influenced the GDP growth rate in the country.  In real terms the growth in the economy grew. The economy of India is growing with many new start ups developing that require large investments.   Many factors affect the economic growth of the country and also it’s GDP (Mishra 2016). 

Conclusion  

GDP or the gross domestic product of the country is an essential measure to evaluate the monetary values of all the final goods and services produced in an economy. There are many components that affect the GDP growth of the country. There are many approaches to evaluate the GDP growth of the economy. The GDP growth rate of India is better than that of Australia and it is fluctuating in nature. The major sector that contributes to GDP is the service sector and the mining sector. The GDP growth rate is expected to rise in future in Australia because the government expenditure and the personal household expenditure are continually rising. The export of iron ore is also rising in the country that greatly contributes to the GDP growth rate of the country. The annual growth of the country is rising at 3 percent. The economic performance Australian territory is rising. The demand and the supply greatly affect the GDP growth of the country. The experts advise that the country will grow if the demand and supply of goods rise at the same rate. The government and the consumers greatly influence the economic activity of a country.   

References

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