Calculation of GDP for Country A and B

Questions:

(1). Table 1: GDP Data for Countries A and B 

	Country A	Country B
$billions Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	$billions
Household Consumption	150	150
Government Purchases	250	250
Transfer payments	50	60
Total Gross Fixed Capital Expenditures	50	150
Change in Inventories	50	-50
Exports	40	40
Imports	20	20

Consider the data in table 1 for two countries: A and B. 

a. Calculate the GDP for both countries.

b. Discuss the usefulness of these data in deciding which, if any, of these two countries is likely to be experiencing an economic recession. 

(2). Obtain Australia’s real GDP and CPI data from 1980 to 2015. Calculate the annual growth rates of real GDP and inflation and graph both series together. Is/are there some interesting or salient relationship(s) between those two series? Provide and discuss plausible economic explanation(s), including change in economic events and change in government policy, for the relationship(s) you identified.

(3). Obtain Australia’s real GDP and unemployment data from 1980 to 2015. Calculate the growth rates of real GDP and unemployment and graph both series together. Is/are there some interesting or salient relationship(s) between those two series? Provide and discuss plausible economic explanation(s), including change in economic events and change in government policy, for the relationship(s) you identified. 

Gross domestic product is the investment that is incurred on the final products and services produced by the economy and the imports are excluded. The formula for GDP is expenditures plus the gross capital formation plus the exports and subtracting imports. The term Gross implies that no subtraction has been done on the basis of depreciation of machines, buildings and different capital goods used during the process of production. The word domestic refers to the production undertaken by the resident of the country. And the term product signifies the end services and products (Kubiszewski et al. 2013).

a. Given the following data:

GDP data for country A and B:

	Country A $billions	Country B $billions
Household consumption	150	150
Government purchase	250	250
Transfer payments	50	60
Total gross fixed capital expenditure	50	150
Change in inventories	50	-50
Exports	40	40
Imports	20	20

Now we will calculate the GDP for both the countries:

GDP of country A= (Household consumption + government purchase + total gross fixed capital expenditure + change in inventories + exports – imports) (“Domestic product – Gross domestic product (GDP) – OECD Data”, 2016).

= (150+250+50+50+40-20) billion dollars

= 520 billion dollars.

So, the GDP of the country is 520 billion dollars.

GDP of country B= (Household consumption + government purchase + total gross fixed capital expenditure + change in inventories + exports – imports)

= (150+250+150-50+40-20)

= 520 billion dollars.

So, the GDP for country B is also 250 billion dollars.

b. The above-provided data plays an important role in deciding, which country may probably face recession. Because the above-provided data helps in calculating the GDP of a country and as discussed in the introduction Gross domestic product is the investment that is incurred on the final products and services produced by the economy and the imports are excluded. The formula for GDP is expenditures plus the gross capital formation plus the exports and subtracting imports.

Household consumption is the expenditure incurred by the household for durable and non-durable goods. Household consumption is used in calculating the GDP of a country. We also include government expenditure in calculating GDP and exports of a country is also an important component in calculation GDP using the expenditure method. Gross fixed capital formation is originally the total investment. It is also an important component in calculating the GDP using expenditure method. It includes expenditure on the improvement of land, machinery, plant, equipment etc. the decrease in the Gross fixed capital formation was significant factor that fosters the recession in the United Kingdom and the financial depression of 1991 and 2008 witnessed a steep fall in the gross fixed capital formation (Egerer et al, 2016).

Usefulness of GDP data in determining economic recession

Inventories are also included in the calculation of GDP. If there is fall in the inventories in a particular year than the difference between the previous year and the recent year is subtracted from the investment. However, the level of inventory is not a component of GDP but it affects the GDP by affecting the investment. Inventories increased when the firm produces more than the amount they sell (Egerer et al, 2016).

 From the above data the GDP of both the countries are same but country A may face recession because the Total Gross Fixed Capital expenditures for country A is less than country B. And the inventories of country A are more than country B, the inventories for country B is in negative (Egerer et al, 2016).

Table 1 includes the real GDP, the CPI, the GDP growth rate and inflation rate of Australia for a period 1980-2015. The data for the GDP and CPI was obtained from Quandl. After obtaining the data, the GDP growth rate and the inflation rate of Australia were calculated for a period 1980-2015.

GDP growth rate is an indicator to highlight how fast an economy is flourishing. This is done by comparing the GDP of one-quarter with the previous quarter of the country. The growth rate of the GDP is directed by four important ingredients of the GDP, of which personal consumption is the most vital director of the GDP. Retail Sales are included in personal consumption. Business investment, government spending, and imports are also the important driver of the GDP growth rate (Amadeo & Amadeo, 2016).

The GDP growth rate in table 1, is calculated using the formula:

GDP growth rate= (GDP₂ – GDP₁ /GDP₁) * 100

Where GDP₁ is the GDP for the current year and GDP₂ is the GDP of the preceding year.

The inflation rate is an instrument that measures the rate at which a currency is losing its value. Inflation rate also measures the rate at which the prices of products and services are increasing over a period, or how less a currency’s one unit can buy at the present time, in compared to the past. One reason that may foster a rise in the inflation rate is excessive printing of money, which result in excessive supply of money and reduction in demand for money. Inflation may also occur when a certain commodity becomes scared and become costlier. Central banks increase and decrease the supply of money in the economy to control inflation. It is important for the inflation rate to fix the income securities, because the returns that are obtained from those securities may not comply with the rate of inflation, resulting in a loss for the investors (Jayaraman et al, 2013).

The inflation rate in table 1 is calculated using the formula:

Inflation rate = {(CPI₁ /CPI₀) – 1} * 100

Where, CPI₁ IS the consumer price index for the current year and CPI₀ is the consumer price index of the previous year.     

Date	CPI	GDP in billions of current dollars	GDP growth rate	inflation rate
1980-12-31	26.35	2862.5	12.17467249
1981-12-31	28.85	3211	4.17315478	9.487666034
1982-12-31	32.125	3345	8.762331839	11.35181976
1983-12-31	35.35	3638.1	11.06621588	10.03891051
1984-12-31	36.75	4040.7	7.572945282	3.96039604
1985-12-31	39.225	4346.7	5.601950905	6.734693878
1986-12-31	42.775	4590.2	6.099952072	9.050350542
1987-12-31	46.425	4870.2	7.8518336	8.533021625
1988-12-31	49.8	5252.6	7.712371016	7.269789984
1989-12-31	53.575	5657.7	5.689591177	7.580321285
1990-12-31	57.45	5979.6	3.251053582	7.232851143
1991-12-31	59.35	6174	5.916747651	3.307223673
1992-12-31	59.925	6539.3	5.190157968	0.968828981
1993-12-31	60.975	6878.7	6.252634946	1.752190238
1994-12-31	62.15	7308.8	4.861263135	1.92701927
1995-12-31	65.025	7664.1	5.690165838	4.625905068
1996-12-31	66.75	8100.2	6.2751537	2.652825836
1997-12-31	66.9	8608.5	5.584015798	0.224719101
1998-12-31	67.475	9089.2	6.286581877	0.859491779
1999-12-31	68.425	9660.6	6.4612964	1.407928863
2000-12-31	71.475	10284.8	3.276680149	4.457435148
2001-12-31	74.625	10621.8	3.348773278	4.407135362
2002-12-31	76.9	10977.5	4.857207925	3.048576214
2003-12-31	79.025	11510.7	6.639040197	2.763328999
2004-12-31	80.85	12274.9	6.670522774	2.309395761
2005-12-31	83	13093.7	5.821120081	2.659245516
2006-12-31	85.95	13855.9	4.486897278	3.554216867
2007-12-31	87.975	14477.6	1.664640548	2.356020942
2008-12-31	91.8	14718.6	-2.03755792	4.347826087
2009-12-31	93.425	14418.7	3.784668521	1.770152505
2010-12-31	96.1	14964.4	3.698778434	2.863259299
2011-12-31	99.3	15517.9	4.107514548	3.329864724
2012-12-31	101	16155.3	3.14385991	1.711983887
2013-12-31	103.5	16663.2	4.110254933	2.475247525
2014-12-31	106.05	17348.1	3.452251255	2.463768116
2015-12-31	107.675	17947	-100	1.532296087

Next, we have plotted the graph of the inflation rate and the growth rate of the GDP, in excel.

Analysis of Australia’s real GDP and CPI data

In the above graph, the blue line highlights the GDP growth rate and the orange line highlights the rate of inflation. The time period is highlighted on the X-axis and the GDP growth rate and the rate of inflation are highlighted on the Y-axis. From the graph, it is evident that the GDP growth rate started increasing from the year 1982 and it continued increasing till the year 1984 and the inflation rate also increased in the year 1982. In fact, both the components were displaying similar trend till 1985. Again in the year 1984 there was a fall in the GDP growth rate.

If the economy of a country is growing due to rising Aggregate Demand and if the AD is increasing faster than the production capacity, then such economic growth can give rise to inflation because due to the increasing demand the price of the products will also increase resulting inflation. Also in the period of rapid growth, the firms employ more numbers of labors, which will increase the job opportunities and the unemployment will fall. As a result, it will become tough for the company to fill up their vacancies thus increasing the wages. And when there is an increase in the wage rate then the company try to dodge the cost by passing it to the consumers (“Conflict between economic growth and inflation | Economics Help”, 2015).

It is also possible to achieve economic growth without creating inflation. If the economic growth is due to increase investment and productivity, then it will result in increasing the productivity of the economy at the same pace as Aggregate demand. This helps in achieving economic growth without inflation (“Conflict between economic growth and inflation | Economics Help”, 2015).

It is highlighted in the graph that during the period of global meltdown, that is the period after 2008 that the inflation rate went up sharply and the growth rate of the GDP shifted downward, in fact, it was in negative. During this period, both the inflation rate and the GDP growth rate displayed negative relationship. Then during 2009 when the GDP growth rate started shifting up, then the inflation rate started shifting downward. From 2010 both the inflation rate and the GDP growth rate started showing the same trend, till 2012 both the components were rising upward. Which means both the GDP growth rate and the inflation rate was increasing, indicating that there is growth in the economy. And this economic growth is due to the increasing aggregate demand, and the increasing demand is more than the capacity of the economy to produce. Due to which the goods and services become rare and result in increasing the price, thus giving rise inflation (Graph 1).

Even during the period 2000 to 2008 both the components were showing a negative relationship. During this period, the GDP growth rate was increasing and the rate of inflation was declining. During this period, the growth in the economy is due to the increasing productivity and investment, so there is no rise in the inflation rate and there is an increase in the growth rate of GDP (Graph 1).           

Relationship between GDP growth rate and inflation rate in Australia

Table 2 includes the unemployment, the real GDP, GDP growth rate and the rate of unemployment in Australia for a period 1980-2015. The data for unemployment was collected from the online site Quandl. And the value of the GDP growth rate and the unemployment rate was calculated.

GDP growth rate is an indicator to highlight how fast an economy is flourishing. This is done by comparing the GDP of one-quarter with the previous quarter of the country. The growth rate of the GDP is directed by four important ingredients of the GDP, of which personal consumption is the most vital director of the GDP. Retail Sales are included in personal consumption. Business investment, government spending, and imports are also important drivers of the GDP growth rate.

The GDP growth rate in table 1, is calculated using the formula:

GDP growth rate= (GDP₂ – GDP₁ /GDP₁) * 100

Where GDP₁ is the GDP for the current year and GDP₂ is the GDP of the preceding year.

Unemployment is a situation when an individual belonging to the working population do not have a job but are willing to work and are desperately searching for a job. For example, if an employee leaves her job to bring her child up or if an individual leaves a job for higher studies than such situations are not considered as unemployment because in this situation they are no searching for a job (“Definition of Unemployment | Economics Help”, 2010).

There are different types of unemployment:

• Unemployment due to deficient demand: such unemployment occurs when there is a lack of aggregate demand in the society.
• Structural unemployment: such unemployment occurs when the present workforce lacks the required skills and knowledge.
• Unemployment due to real wage: such unemployment occurs when the wages are above the equilibrium level.
• Frictional unemployment: such unemployment occurs when there are workers in between jobs. For example, it takes time for a school leaver to find a job. There always prevails frictional unemployment in an economy because every individual take sometimes finds a job that complements him.
• Voluntary unemployment: and such unemployment occurs when an individual is willing unemployed or they are not ready to work at the prevailing wage rate.

Unemployment rate is an important tool that measures the occurrence of unemployment and is calculated using the formula:

Unemployment rate= unemployment / total labour force * 100 

Date	unemployment	GDP in billions of current dollars	GDP growth rate	unemployment rate
1980-12-31	408.6106	2862.5	12.17467249	6.040514173
1981-12-31	393.8846	3211	4.17315478	5.722572011
1982-12-31	494.925	3345	8.762331839	7.087485274
1983-12-31	697.0384	3638.1	11.06621588	9.866659848
1984-12-31	641.2146	4040.7	7.572945282	8.900710573
1985-12-31	602.8681	4346.7	5.601950905	8.179751468
1986-12-31	613.1224	4590.2	6.099952072	8.006934771
1987-12-31	628.8614	4870.2	7.8518336	8.033761197
1988-12-31	576.2193	5252.6	7.712371016	7.162711935
1989-12-31	508.068	5657.7	5.689591177	6.122776171
1990-12-31	584.802	5979.6	3.251053582	6.870526237
1991-12-31	812.6211	6174	5.916747651	9.515920284
1992-12-31	917.517	6539.3	5.190157968	10.7209192
1993-12-31	933.7462	6878.7	6.252634946	10.81752748
1994-12-31	850.3487	7308.8	4.861263135	9.682852987
1995-12-31	757.7033	7664.1	5.690165838	8.438762705
1996-12-31	771.5511	8100.2	6.2751537	8.48667283
1997-12-31	763.4834	8608.5	5.584015798	8.385908788
1998-12-31	708.1152	9089.2	6.286581877	7.668925424
1999-12-31	639.9935	9660.6	6.4612964	6.888375373
2000-12-31	596.7537	10284.8	3.276680149	6.237930504
2001-12-31	651.7646	10621.8	3.348773278	6.714997589
2002-12-31	624.9985	10977.5	4.857207925	6.325681024
2003-12-31	592.2021	11510.7	6.639040197	5.909836792
2004-12-31	545.0514	12274.9	6.670522774	5.366156367
2005-12-31	523.5905	13093.7	5.821120081	5.017153014
2006-12-31	508.4875	13855.9	4.486897278	4.763715322
2007-12-31	477.6078	14477.6	1.664640548	4.356801924
2008-12-31	474.4643	14718.6	-2.03755792	4.227501217
2009-12-31	636.2413	14418.7	3.784668521	5.56440853
2010-12-31	605.9849	14964.4	3.698778434	5.205221283
2011-12-31	600.3173	15517.9	4.107514548	5.074995466
2012-12-31	625.0701	16155.3	3.14385991	5.37519481
2013-12-31	686.455	16663.2	4.110254933	5.721716226
2014-12-31	745.5787	17348.1	3.452251255
2015-12-31		17947

After calculating the real GDP growth rate and the unemployment, the graph of the unemployment rate and the GDP growth rate was plotted using excel.

In the above graph, the blue line highlights the GDP growth rate and the orange line indicates the unemployment rate. In short-run it is very difficult to highlight the relation between the economic growth and the unemployment rate. It is not uncommon for the unemployment rate to show a declining rate if the other important measures of economic are showing positive growth. The unemployment rate does start falling as soon as the economy of a country start growing after a period of recession because many companies have employees that are underutilized according to the salary they are offered and more over laying off employees during the period of recession or falling aggregate demand and again hiring new employees after the period of recession of when the aggregate demand increases (Graph 2).

As visible from the graph during the period between 1982 and 1983 both the unemployment rate and the GDP growth rate was increasing and during the period 1983 to 1985 both the unemployment rate and the GDP growth rate were declining (Graph 2).

Even during the period of great depression both the components were displaying similar trend, GDP growth rate, and unemployment rate both started falling but the GDP growth rate was falling at a higher rate, which shows that even during the period of recession the employment rate was increasing in Australia (Graph 2). 

References

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Kubiszewski, I., Costanza, R., Franco, C., Lawn, P., Talberth, J., Jackson, T., & Aylmer, C. (2013). Beyond GDP: Measuring and achieving global genuine progress. Ecological Economics, 93, 57-68.

MWORTH | Australia the real GDP. (2016). Quandl.com. Retrieved 24 May 2016.