An Analysis Of Gross Domestic Product, Unemployment, Government Expenditure, And Gross Capital Formation In Australia And Other Countries

Gross Domestic Product

Gross domestic product of a country represents monetary value of all the produced goods and services within the boundary of a nation. In order to compute GDP, the volume of output is multiplied with their respective market price. Now, nominal GDP uses market price of the current year while real GDP uses market price of a fixed base year (Burfisher 2017). The real GDP thud is adjusted for inflation, which can understate or overstate the value of output. For Australia, both real and nominal GDP at levels is has constituted an upward trend. In the presence of a stable price level the difference between nominal and real GDP are gradually narrowed.

So far as the growth rate is concerned the nominal GDP growth is slightly above real GDP growth rate for all the years. The implicit price deflator used to compute real GDP from nominal real changes in response to changes in terms of trade (aph.gov.au 2018). The decline in the terms of trade since the beginning of 2011 creates a deflationary pressure on the economy casing real GDP growth rate to exceeds the nominal GDP as shown from the figures.

Table 1: Inflation, unemployment, gross capital formation and expense in Australia

(Source: data.worldbank.org)

Table 2: Inflation, unemployment, gross capital formation and expense in South Korea

(Source: data.worldbank.org)

Table 3: Inflation, unemployment, gross capital formation and expense in United Kingdom

(Source: data.worldbank.org)

Table 4: Inflation, unemployment, gross capital formation and expense in China

(Source: data.worldbank.org)

Table 5: Inflation, unemployment, gross capital formation and expense in Japan

(Source: data.worldbank.org)

Unemployment in an economy is defined as the condition where some members of the labor force are unable to find jobs at the wage prevailing in the economy. Gross capital formation measures the change in net physic assets of an economy. The government expenditure on the other hand measures spending made by government in the given year (Rodriguez 2013). The increase in government expenditure and gross capital formation can together contribute to a decline in unemployment level.

In Australia, government expenditure as a percent of GDP has shown an overall rising trend indicating considerable government support. Gross capital formation also shows an upward trend. In last two, three years’ gross capital formation though declines slightly but is still higher than that in 1990-91. The unemployment in Australia has declined gradually and finally settled at around 5%. In China, gross capital formation and government expenditure increases sharply with unemployment remaining at a fairly stable level of 4%. In South Korea, Gross capital formation shows a declining trend. The government expenditure shows a very slow progress. Unemployment rose sharply from 1990 to 1999, reaching to 6.34%. After that it started declining and remain around 3%. Like South Korea in Japan also gross capital formation shows a declining trend. The government expenses in Japan does not increases much. Unemployment rate though initially increases but from 2011 onwards unemployment rate has declined gradually. In United Kingdom, government expense has increased significantly while gross capital formation has declined. Starting from a very high level unemployment rate has declined gradually.

Gross Capital Formation and Unemployment

The unemployment rate in the developing nations like China, South Korea and Japan is lower than that in Australia and United Kingdom. This reflects that the developing nations are gradually catching up with the developed nation. In South Korea, Japan and United Kingdom Gross Capital formation has slowed down. While in Australia and China it has increased steadily. The share of government expense as a percentage of GDP is higher in Australia and United Kingdom as compared to rest of the three nation.

(Source: rba.gov.au 2018)

A country’s trade balance is influenced by the prevailing exchange rate. A lower relative price of currency contributes to a favorable trade balance by increasing export of the nation. An appreciation of currency on the other hand has an unfavorable effect on balance of trade (Rodriguez 2013). Till September 1991, the relative price of AUD has declined. With depreciation of AUD the trade balance has improved. Overall, there is an appreciation of AUD against JPY contributing to a negative trade balance. The value of AUD again Chinese Yuan or Great Britain Pound remain mostly stable. However, for these countries as well with a depreciation of currency trade balance has improved while during appreciation trade balance has worsen.

Government designs fiscal policy depending on state of the economy. In times of recession, government takes expansionary fiscal or monetary policy to revive the economy. Under expansionary fiscal policy government either increases its spending or cut in tax. The effect of government policy tool on output can be described using the model of aggregate expenditure.

 In the model, the equilibrium level of GDP is determined from aggregate expenditure and planned expenditure. The aggregate expenditure curve shifts in the opposite direction of change in tax.  If there is an increase in autonomous tax, then aggregate expenditure curve shifts down by a fraction of the tax change. In case of a decline in tax rate, the aggregate expenditure curve goes up by the portion of tax (Benhabib, Wang and Wen 2015). The proportionate shift in aggregate expenditure is less than the proportionate change in tax rate as the change in consumption is lower than the corresponding change in tax rate. A cut in tax rate increases aggregate expenditure shifting the curve upward. The shift is however less than the cut in tax rate. As aggregate expenditure increases given the planned expenditure contributes to an increase in equilibrium GDP.

The upward sloping curve AE shows aggregate expenditure that the economy planned to spend in a given year.  The 45⁰ line represents all the point for which aggregate expenditure equal the real GDP. Equilibrium in the economy is determined where these two curves intersects. E is the equilibrium point with the given level of expenditure. Now, with a tax cut of $20 billion AE curve shifts upward but less than $20 billion. The new equilibrium is at E₁ indicating an increase in real GDP to Y_1.

Trade Balance

Given the marginal propensity to save, it is now possible to determine the exact magnitude of shift in aggregate expenditure and that of the change in real GDP.

MPS = 0.2

MPC = 1 – MPS = 1 – 0.2 = 0.8

The aggregate expenditure curve will shift by,

MPC * change in tax = (0.8 * $20) = $16 billion.

The real GDP will then increase by

Long run equilibrium is obtained from the aggregate demand and long run aggregate supply curve. The aggregate demand curve in the long run s shown as AD_1.  The aggregate supply curve in long run is a vertical straight line. The economy in the long run already reaches to its maximum potential level. This makes the supply curve vertical. The long run equilibrium is at E. A decline in investment expenditure marks a decline in aggregate demand shifting the aggregate demand curve inward (Gottheil 2013). With this the new equilibrium is at E_1. Consequently, price level in the long run decline to P₁ keeping the output level at Y_E

In response to the low price, the short run aggregate supply curve shifts leftward. The supply shortage gradually pushes prices up. Because of a price increase, the supply increases. In the second round effect, with an increase in aggregate supply real GDP recover ensuring long run potential level.

In the short run, aggregate supply curve slopes upwards depicting a positive relation between supply and price (Goodwin et al. 2014). The adjustment thus is different from that in the long run.

AS is the short run aggregate supply curve. The short run equilibrium is at A.  Decline in investment reduces aggregate demand shifting AD curve inward. With this the equilibrium move down to B. Real GDP now declines to Y₂ with a decline in price level to P_2.

Prescribed policy action

The central bank in this situation should take an expansionary monetary policy. This is to increase the money supply in the economy (Gottheil 2013). As money supply increases, there is a decline in equilibrium interest rate. The declined interest rate would then help to boost investment. In order to increases money supply, central bank can make purchase bonds through open market operation.  The central bank can also adjust reserve ratios to raise the money supply.

Economics, as a subject has developed considerably with time with the domain of the subject expanding with time, which in turn gives the economists huge scopes for venturing in different areas of professional domains. In this context, thought I have different options in different career domains, I personally feel intrigued to venture in the domain of policy planning and decision making for public economic sector, especially to improve the overall economic welfare of the country, for which I want to look for professional engagements in the public economic policy planning sectors.

Fiscal Policy

The job of a public policy planner calls for immense responsibility, duty and unbiasedness as well as for the presence of passion for the country and its residents, along with the knowledge of the subject and insights about the economic and other dynamics of the country as well as of the exogenous factors. The main roles played by a public policy planner includes:

• Analysing the economic structures of the country
• Analysing the pros and cons existing in the infrastructure of the same
• Exploring new arenas of development
• Designing proper and welfare-oriented strategies for the population of the country
• Ensuring cost effectiveness, maximum social welfare and minimum trade off unbiasedly

For these activities, the primary skills which are required to be present are robust economic concepts and knowledge of reality along with abilities to research, interpret and explore the different economic phenomena, clubbed with capabilities of providing insightful predictions regarding the effects of the different phenomena on the economy of the country. It also needs strong analytical skills along with the passion to unbiasedly work for the betterment of the population, without looking into personal benefits solely. Personally, I feel that I possess most of these skills to a considerable extent.

As per the personality test results, my personality is primarily investigative, creative as well as analytical with special inclination to research and problem-solving activities. In accordance to this, I feel eligible for this position:

Value- Personally I have the passion to work for a social welfare cause

Interest- I feel intrigued in exploring both empirical and abstract data and derive reasonings, logics and predictions from them

Personality- My investigative as well as creative traits can be especially helpful for the concerned job

Skills- I can engage myself in critical problem solving and in coming up with new way outs

All these aspects can be relevant to the job which I aspire to do in my future career after competition of my academic degree.

The concerned video of a relevant and fruitful, insightful interview with Anjali Suriyakumaran, who, being a graduate in economics, has been currently working in ACCC as an analyst, which is the type of job I aspire to do in my future. The video highlights several crucial aspects which are of immense importance to clear doubts of the students who are budding economists and want to build their professional career in this domain.

Keeping these confusions and concerns into consideration, Anjali highlights that there are multi-dimensional scopes for economists in future. However, she highlights the importance of engaging in different types of non-academic social as well as professional commitments on part of the students while pursuing their degrees. Personally, she highlights the perks of engaging in social works as an integral part of a student’s life. In professional front, she herself pursued a full-time internship during her academic career, which she highlights to be a helpful factor for her professional career development in the later part of her life. Anjali highlights that engaging in internship can help a student to develop professional skills like time management, multi-tasking, taking work pressure and other aspects in their student life apart from gaining experiences and insights about how professional organizations work. Anjali, in the aspect of guidance for the students regarding internship suggests them to talk to their seniors and those with experiences in these fields in order to gain help to acquire internship.

The domain of operation of Anjali being almost same as that of my aspirations in future, I have already started taking several steps towards my dreams. In terms of skills, I have acquired some of them which may help in finding the desired job of a public policy planner. However, I need to talk to my seniors and teachers to get ideas about internship and part time job programs which will be helpful for me to increase my eligibility as a policy planner in the public organizations of Australia in my professional domain in the future.

Reference list

Abs.gov.au. (2018). 5368.0 – International Trade in Goods and Services, Australia, Jan 2018. [online] Available at: https://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/5368.0Jan%202018?OpenDocument [Accessed 29 Apr. 2018].

Abs.gov.au. (2018). Australian Bureau of Statistics, Australian Government. [online] Available at: https://www.abs.gov.au/ [Accessed 29 Apr. 2018].

Aph.gov.au. (2018). Looking back nominal and real GDP growth – Parliament of Australia. [online] Available at: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/FlagPost/2013/September/Looking_back_nominal_and_real_GDP_growth [Accessed 3 May 2018].

Benhabib, J., Wang, P. and Wen, Y., 2015. Sentiments and aggregate demand fluctuations. Econometrica, 83(2), pp.549-585.

Burfisher, M.E., 2017. Introduction to computable general equilibrium models. Cambridge University Press.

Data.worldbank.org. (2018). Indicators | Data. [online] Available at: https://data.worldbank.org/indicator [Accessed 29 Apr. 2018].

Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Macroeconomics in context. Routledge.

Gottheil, F., 2013. Principles of macroeconomics. Nelson Education.

Reserve Bank of Australia. (2018). Historical Data | RBA. [online] Available at: https://www.rba.gov.au/statistics/historical-data.html#exchange-rates [Accessed 29 Apr. 2018

Rodriguez, C.A., 2013. Money and wealth in an open economy income-expenditure model. The Monetary Approach to the Balance of Payments, pp.222-36.

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