Calculating GDP, Exploring Relationships Between Real GDP And Inflation And Unemployment In Australia

Calculating GDP for Countries A and B

(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	2

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.

Country A:

Household consumption+ Government purchases + Total Gross Fixed Capital+ Changes in inventory (Exports – Imports)

=150+250+50+50 +(40-20)=$520 billion

Country B:

=150+250+60-50+(40-20)=$430 Billion

 GDP is calculated by using the formulae GDP = C + G + I + NX

C represents private consumption, or consumer spending, in a nation’s economy, G represents the total value of government spending, I = total investment (spending on goods and services) by businesses,capital expenditures and NX is the nation’s total net exports, (NX = Exports – Imports).

or it is customary to mention or cite as GDP is an acronym that summarizes the expression of Gross Domestic Product or Gross Domestic Product, an extended concept in many countries as GDP (Gross Domestic Product). This is a notion which includes the total production of goods and services a nation during a given period of time, expressed as an amount or monetary price.

By delving about the importance of GDP, we see that it is covered by national accounts and only covers products and services arising within the framework of the formal economy (ie, it neglects what is known as black work, trade in services among friends, illegal business, etc. 

It is important to note that GDP is linked to production within a given territory, beyond the origin of the companies. For example, a French company with production in Chile brings the Chilean GDP, to cite one case by reference.

Usefulness of GDP data for economic recession

The monetary valuation of GDP can be done according to the market price (including subsidies and indirect taxes) or according to factor cost and enables the government to know which sector of the economy needs to be given more emphasis so that there can be more output.The per capita GDP, finally, attempts to measure the existing material wealth in a country from dividing the total GDP by the number of inhabitants. The result, of course, does not reflect the reality of each person, since there are huge differences in the distribution of wealth. The information is used to determine the  social welfare index of the people.

According to a proposal by the United Nations Environmental care, this information, which all countries cling to know the reality, is a perverse indicator of social welfare, only it reflects the amount of financial transactions that have been made in that country, no matter at what cost or who they were possible (Bai and Wei, 2000).

 It is used in planning; The evaluation of statistical data is based on an inductive process. This means that from a small number of private data, try to draw a general conclusion.. That is why such evaluations are always subject to error. However, it is surprising how effective that has come to be achieved by such considerations. It is far from a coincidence that is used for studies of diverse materials.

It is also useful in the field of politics. For example, when required to conduct a survey of the intention to vote for a particular candidate are often taken surveys in different social strata and different regions of the country. Country B is most likely experiencing recession as it has a lower GDP.

	GDP in ($ billion)	CPI
1980	149.7	48.8
1985	180.2	67.8
1990	310.9	100
1995	368	113.9
2000	412	127.7
2005	693.3	147
2010	1141	170.3
2015	1620	108.4

Series 1= GDP in $ billions

Series 2=CPI

Relationship between GDP and inflation

The graph shows that with increase in Gross domestic product there is always an increase in consumer price index.Inflation is an economic phenomenon; consisting of the significant and continuing increase in the general level of prices of goods, services and productive factors of a country. Inflation thus implies reducing the purchasing power of money, and this affects all economic agents. Inflation is not calculated with the Consumer Price Index, that is an approach that facilitates its estimate in the short term. Inflation is rise prices  of the economy, ie wholesale price of fixed assets, of agricultural products in the field, etc. 

Exploring the Relationship between Real GDP and Inflation in Australia

Prices of products are established based on two forces: the offer is the production of goods and services, demand that is what people need or require (feed, clothe and have fun etc.) and companies require for their production process, if there is an imbalance in one of those two forces, there is talk of inflation (more demand than supply) or deflation (more supply than demand).

Knowing the components of aggregate demand are household consumption, demand for business investment and government spending; Keynesian explanation of inflation is based on the sum of these three components may be higher than the country’s productive capacity.

Monetarists also believe that inflation is mainly caused by excess demand, but instead of looking among the agents a particular culprit, consider that it is the uncontrolled growth of the amount of money in circulation which will increase sufficient available to all agents in general and therefore all components of demand. Therefore, if the money supply is greater than the production capacity (GDP), inflation will be generated.

Inflation is negative for the generation of goods and services of GDP, because it lacks the purchasing power of the population causing a decrease in savings under more money goes to buy food and other necessities for the family welfare then decreases demand and producers must reduce their production, 

They cause an increase in interest rates, which for people who have debts, their situation becomes difficult as they must devote more resources to pay debts with their respective interests and businesses represents a high cost to produce. 

One component of GDP is government spending, variable make it grow it is not exactly beneficial, for example, public spending this year in USA will be very high for all rescue maneuvers and spending that has infiltrated to stop I unstoppable. It is possible that a correction factor calculation of GDP is used because otherwise the false notion that the economy has grown by the effect this will have huge public spending.With inflation one cannot say that the consumer will not buy because if the consumer does not purchase would not have inflation because inflation is the rise in prices of consumer goods, and consumers need consumer goods.

The relationship then it would be that inflation distorted GDP values ​​are obtained, since consumer income should go almost all toward the purchase of goods indispensable consumption and decreases or savings, which is another variable of GDP disappears. With the distortion of prices and costs the variables involved in the calculation of GDP are distorted, so correction factors to conceal or diminish this distortion are used.

Plausible Economic Explanation for the Relationship between Real GDP and Inflation

inflation causes some comfort, although long term ends up attacking the foundations of economic growth: savings and investment. In the short term, inflation is accompanied by some positive indicators that are reflected in the famous Phillips curve, a negative empirical relationship between unemployment and rising prices. This relationship is widely used as an argument to sustain inflationary policies because it suggests that expansionary policies will keep unemployment low cost with only a little inflation (Haugen and Musser, 2011).

In short periods, it has a certain logic and because the economy can grow in the short term using the resources you have more intensively. In a context of low unemployment and low idle capacity, competition for productive resources becomes stronger, boosting wages, raw material costs, labor demand and prices and inflation appears. In the long term, the rate of expansion of the economy will depend on the level of capital, infrastructure, technology, labor and human capital (Bank, 2013).

This growth is called long-term growth potential. This potential growth can be interpreted as the potential GDP growth, sometimes treated as the highest GDP could be achieved at a given time if the most of all the capital stock and all the jobs available are used and, sometimes, interpreted as GDP maximum that can be achieved without generating inflation.In general, both meanings of potential GDP can be used similarly because potential growth is similar in both cases. For the sake of simplicity we will refer to as the maximum potential GDP  can be achieved (Bai and Wei, 2000). 

In practice, it will never reach this maximum GDP, but attempts to achieve it lead to greater economic growth in certain period and also to higher inflation. When the government makes expansionary policies as excessively increase the amount of money or government spending, what it does is push the GDP to grow faster than potential GDP grows (Bologna, 2010).

In a scenario of high unemployment and high idle capacity, the economy will expand, as happened between 2002 and 2005 in Australia (Todaro and Smith, 2006). However, if the same policies continue to apply under low unemployment and low spare capacity, there will be inflation. This, in turn, drives consumer. Increased liquidity monetary issue that accompanies inflation causes a low interest rate, which discourages saving and encourages consumption. Thus, a new “feel” of being created. 

However, lack of savings ends up reducing the financing of productive investment, which is one of the main pillars of growth potential. This process tends to perpetuate itself. As there is more inflation, less and less is invested grows. Whereupon, expansionary policies are generating more inflation and less growth. In the end, the potential GDP stagnates and inflation can turn into hyperinflation,.

Exploring the Relationship between Real GDP and Unemployment in Australia

In short, inflation initially creates a sense of well-being, the economy manages to grow a little faster than it would without expansionary policies and interest rates become negative in real terms (they are lower than inflation, which encourages consumption and even some kind of short-term investment). However, long-term domestic savings and economic fundamentals become volatile (exchange rate, real wages, etc.) are discouraged, all of which ends up impacting on levels of long-term investment and economic growth is punished. This impacts on the collection, there are problems such as the “Tanzi effect” and leads to fiscal problems (Singh, 2013).

If this deficit is financed by printing money, increasing inflation is generated, but no impact on the level of activity because the economy is already “overheated”. If this process does not stop in time it becomes a vicious circle that costs increasingly emerge as a drug. 

Year	GDP in ($ billion)	Unemployment rate
1980	149.7	0.061
1985	180.2	0.082
1990	310.9	0.069
1995	368	0.0848
2000	412	0.0627
2005	693.3	0.0505
2010	1141	0.052
2015	1620	0.058

Consider a thorough analysis of macroeconomic agents could lead to general conclusions, where they generate improvements in chain for developing countries according to the trends that these have over time, thus affecting individuals a personal background that together promote substantial benefits for the entire population and the country’s growth (IMF glossary, 2002).It is in this way that the macroeconomy provides powerful tools to analyze the real world as it is based on issues such as inflation, unemployment, economic cycles, economic growth and balance of international payments, based on the study of the economy on a large scale (The Little Data Book 2007,).

For this reason, the study of the possible consequences that entails an increase or decrease in the macro factors affects us all; therefore, economic growth, employment rates and unemployment, increase or decrease in investment, capital, savings, inflation, disturbances in the exchange rate and its interrelation produce consequences on developing countries and is no exception in the case of Costa Rica.

An analysis of the Gross Domestic Product (GDP) and unemployment rates creates a question: What effect generates GDP on the level of employment in a country ?, so we headed to discover whether there is a relationship between them and what they are disturbances that cause the population.

Unemployment rates are studied in order to know its relation to the welfare of the population hence to reduce unemployment is assumed to lower the poverty which is not true in its entirety but conclusions tend to think, so it is said that when an economy is in recession unemployment rates tend to rise this that income is reduced and therefore the demand, so that the companies produce and sell less and also hire fewer staff here their relationship GDP and the chain reaction of macroeconomic agents. 

Plausible Economic Explanation for the Relationship between Real GDP and Unemployment

Employment gives people the ability to generate income and through these purchase goods and services to meet the needs and thus create a better standard of living. How much has to grow GDP to increase employment and reduce unemployment? This is a very common question that usually get similar answers: about 2%. However, the question is not well founded because there is bidirectional causality between GDP and employment macro magnitudes (Informing a nation, 2005). Depending on productivity, higher GDP growth leads to an increase in net employment. Depending on the use of the remaining productive inputs, more employment implies a higher GDP growth via aggregate demand. Neither the previous answer is necessarily correct: as evidenced then depends on many other factors.

There are alternative visions of labor market functioning emphasizing different causal mechanisms. According to neoclassical theory, given the existing technology, the level of real wages (minus GDP deflator nominal wage) determines the number of hours worked with companies maximize their profits. This level of employment is not dependent on aggregate therefore under perfect competition demand, companies can sell what they want at the equilibrium price. On the contrary, calling into question the competitive functioning of markets for goods and services, Keynesian theory predicts reverse causality: from the output / employment to real wages. Because of new technology, employment is determined by aggregate demand that companies operating in monopolistic competition, where price-cost margins play a relevant role face. For a predetermined level of employment, labor demand of these businesses real wage sets compatible with minimizing production costs.

Thus, the response of 2% comes from using the historical data of the Australian economy to fit a linear relationship between the growth rates of employment (dependent variable) and GDP (explanatory variable). This relationship implies that the first rate is equal to the second multiplied by a slope (elasticity of employment to GDP) plus a constant (ordinate) that indicates the change in employment when GDP does not change (Macro Economics, 2006). Dear both parameters, we can easily calculate what is the threshold rate of GDP growth consistent with a zero rate of change of employment. Being a growing relationship, higher rates (lower) than the threshold will mean creation (destruction) Net employment. The same exercise can be formulated using variations in the unemployment rate in a year compared to the previous. Since the change in the unemployment rate roughly equal to the difference between the growth rates of the labor force and employment, the fact that the workforce fluctuates much less than the occupation means that the new threshold is similar to the previous one.

Importance of GDP in Planning and Politics

The problem with this simple approach is that the adjustment of the linear relationship to the observed data can be quite poor (large waste) besides showing symptoms of instability over time. Why? Simply because key elements are ignored in both theories, such as changes in the evolution of existing technology, prices of labor, the degree of competition in markets for goods and services and the adjustment costs of inputs (costs of firing and hiring, installation costs of machinery, etc.) (Macro Economics, 2006). 

How to maximize profits and minimize production costs are dual problems in company operations to a given technology (production function), estimate the threshold GDP growth needed to improve the outlook of our labor market is not such a complicated task . It is derived demand functions of the factors to produce a given output, abstracting how this is determined amount (Singh, 2013). There econometric techniques that allow this approach. They can also be obtained thresholds GDP growth in the short and long term, depending on the dynamics of adjustment costs. 

The results of this paper indicate that the fall in real wages, lower dismissal costs and the slight increase of temporality may have reduced the threshold needed to create net employment to about 1%. Even 0.3% would be sufficient to reduce the unemployment rate, given the progressive reduction of the workforce, via discouragement and emigration (Singh, 2013). The demand and supply policies aimed at overcoming such thresholds GDP growth and to improve the quality of the new jobs are another matter.  

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