Real GDP per capita of New Zealand and Australia from 1980 to 2005
The figure below shows the real GDP per capita of New Zealand and Australia from 1980 to 2005.
The graph shows the real GDP of both countries where from 1980 had a relatively the same trend with the same levels of income. It was due to lack of productivity in both nations. However, from the graph New Zealand has consistently diverged fromAustralia’s GDP percapita from the year of 1970 to 2005. New Zealand experienced a strong growth in productivity with relatively weak employment growth in the period of 1980. Whereas, in the period of 1990, weak productivity with a relatively strong employment were also experienced. High inflation was later experienced in New Zealand during the period of 1980 (Reserve Bank of New Zealand, 2018).
A reduction in demand for mineral commodities was experienced by the Asians due to economic crisis during 1990. With this crisis, there was an increase in production of metalliferous commodities by the Australian firms which worsened the oversupply that maintained the downward mental price pressure. It also increased the production of commodities from other countries(Burns and Baffes, 2018). More so, there was another burden from gold producers of England, Russia, Malaysia and Jordan that reduced these prices which resulted in abolishing of the gold role as national reserve asset.
As the result some of the high cost operations closed and fluctuations in the mining shareholder industry continued. More variations were seen as reports to the Mineral Council of Australia indicated a decline from 23.0% to 2.0% in 1997 to 1998 and 1989 to 1990 respectively (Burns and Baffes, 2018). Therefore, different handling of the Asian crisis of 1990 with restrictive monetary policy of New Zealand contributed to the divergence in the level of GDP per capita.
Question 2
NewZealand faces a lot of critiques for keeping the official cash rate constant at 1.75% since 2016 (Burns and Baffes, 2018).Okun’s law explains this situation with an equation below. Yt – Y*t = ? + β (Ut – Ut*) + ?. Where Yt – Y*t, is the output gap, ?- is the intercept, β- Okun’s coefficient, (Ut – Ut*) – unemployment gap(Kav, 2012). The law provides a link between output gap and unemployment gap by relating them to the labor market conditions to the conditions in the goods market.
According to Kav, 2012, the presence of natural rate hypothesis, would result to a belief that an equilibrium level of the output consistent would be obtained with a long run stable inflation. However, a great concern with this output gap concept is the difficulty in its measurement. The output level is directly obtained from the macroeconomic data because it is unobservable. It involves some risks like low business confidence within the nation. When this happens, investment decisions and employment are greatly affected.
The next decision should say the official Cash Rate reduced which encourages investment within the nation. When this is done, production is increased as the output gap is maintained in a good position. The output gap is the difference between the actual output and potential output. That is to say; Y – Y*, where Y is the actual output and Y* is the potential output. However, potential output is the level that is consistently maintained in the economic activity without pressure from inflation(Burns and Baffes, 2018).
Analysis of the Reserve Bank of New Zealand’s decision to keep the Official Cash Rate
With that, the economy should always maintain the potential output level with its productive capacity. Otherwise inflation rises due to demand pressures from key markets when output gap is positive and the potential output is less than the actual output. Similarly, the same reasoning applies when there is a negative output gap. Okun’s law states that for every increase in 1.0% of unemployment rate, there is a 2.0% additional in a nation’s GDP which is lower than the potential GDP(Burns and Baffes, 2018).
That is to say; (Y – Y*)/ Y* = c(u-u–), where, Y – actual output, Y*– potential GDP, U- actual unemployment rate, u– – natural rate of unemployment and c- is the factor relating changes in the unemployment with the changes in the output. So, unemployment is directly proportional to the fall in the GDP(Kav, 2012). Hence, demand for imports increases with increase in the unemployment for rate in the nation. Y= Mx + C, where Y- is the demand, M – level of imports and C is the constant.
Question 3.
The graph showing real GDP per capita for USA from 2000 to 2016
The crisis response begins with the action of keeping the liquidity pressure through the liquidity support and bank holidays(Kav, 2012). This action was followed with a many measure like asset purchase which are taken to rebound bank structure and regenerate economic growth and development(Kav, 2012). It is generally more complex to compare the effective policies to the crisis due to differences in time zone and the initial size of the financial system.It is composed of quality of institutions, scope of interventions by policy makers and the financial size system of a country. With this evidence, we can now compare the policy responses by the other countries.Failure to have large financial institutions could have constrained them from responding to the crisis(Kav, 2012).
The involvement of the large scale and government intervention in the financial institution and sectors could have helped to immediately respond to the crisis. The real GDP per capita for USA was increasing from the year of 2000 to 2016. This shows the country was doing much better since its economic policies were put into consideration.It is seen from the graph that the real GDP per capita was increasing over time due to good policy makers. USA made full utilization of their available resources to generate enough income for their citizens which increased their purchasingpower(Kav, 2012). On the other hand, presence of dormant and unexploitable resources in Greece, Italy, Portugal and Spain restricted their growth in real GDP per capita.
Question 4
The graph showing New Zealand government spending, taxes and welfare payments from 2000 to 2015
It clear that there was an increase in New Zealand debt from $68 billion to $136 billion from the year of 2008 to 2012. The welfare payments increase from the year of 2000 to 2015 because of the government debt. Government spending composes of many services provided by the state and local government. The government runs a deficit budget when its expenditure exceeds revenue. The budget deficit increased due to the shifting of the financial markets which has also increased the burdens in debt. Similarly, the cause could be the increasing import demand that increases the profits for foreign companies.
Therefore, budget deficit is T- G, in the case where G>T
4019.00 – 11499.00 = $7480 as the budget deficit of New Zealand.The government debt could have increased due to many reasons like poor financing of the initial debt and lack of enough resources to pay back the loan.The government did not make any response in repaying the initial loan but instead the debt increased which indicates lack of response by the government (Kav, 2012).
Question 5.
The graph shows inflation measured by GDP deflator and the CPI for New Zealand from 2000 to 201 respectively.
The CPI inflation and GDP deflator inflation look to be the same because they are both used to determine the price inflation. However, the GDP deflator looks at goods that are domestically produced while CPI inflation concerns with a measure of all goods bought by the consumers including the foreign commodities (Kav, 2012). For this case, the Reserve Bank may not be able to control the inflation using the CPI since consumers would not stop buying foreign commodities. This is because consumers have an inelastic demand for foreign goods. Hence the two series look divergent in control the inflation rate(Kav, 2012)
References
Andrew Burns and John Baffes. (2018). Macroeconomic Environment, community markets: A Longer-Term outlook. Expert Meeting on How to feed the world in 2050. Economic and social development department.
Sudiman Kav. (2012). How the Macroeconomic Environment and Investment Climate Have Affected the Manufacturing Sector. Trade and Investment Climate. Kingdom of the Netherlands.
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