Description
This report is about an analysis of the economy with reference to some macroeconomic issue or some economic policy. You are to choose a major macroeconomic policy issue facing a country, compare it with another country where there is no such problem or where there has been a great policy response to the issue. You will compare the two economies and prepare a report (using the example of success economy) that can be used as a policy briefing paper providing recommendations to the other economy.
Steps:
1. Select 2 research papers choosing 2 different countries published in refereed/peer-reviewed journals related to topics studied in MACROECONOMICS in this unit.
2. Your research papers should be based on two different countries e.g. if you plan to do research on monetary policy, you may select an article based on Australia and another one on China, U.S., U.K., Japan etc. To give your report a global perspective, you will be making a comparative analysis of the economy being chosen to deal with the current issue with some other economy. An example can be, monetary policy as a very effective tool in a country like Australia and monetary policy not so effective as a tool in a country like zimbabwe. In this example, you are comparing a success story of an economy with an economy that has failed and providing recommendations to the failing economy. A great topic could also be the recent global pandemic due to COVID-19 and how two different economies deal with the crisis using macroeconomic policies.
NOTE: WHEN YOU READ THE JOURNAL PAPERS, YOU ARE NOT EXPECTED TO COVER THE METHODOLOGY SECTIONS OF THE PAPERS. So you can overlook the methodology section or the econometric models used in the papers and keep your focus on the research questions (aims of the papers) and the findings/ results of the papers. So do not worry about the data section.
3. The report should have sections such as (1) introduction (2) critical review for first article (3) critical review for second article (4) a comparative analysis of both the articles and (5) conclusion and recommendations based on the analysis followed by a reference section.
4. Also, attach a one page executive summary at the beginning of your report- this is optional.
5. The approximate length of the report is around 2000 words.
6. Attach the scanned copy of the full (or the first page, if the papers are too long) of two main articles and attach it at the end of your report before submitting it on Turnitin under the “Assessment tab” on BB. Refer to other report requirements from Report 1 section in this UO.
Some examples of Australian peer-reviewed journal papers include Economic Record, Australian Journal of Labour Economics, Economic Papers.
Unformatted Attachment Preview
Comparative Analysis of
Monetary and Fiscal Policy
during the Financial Crisis A
Case of the United States &
China
ECON5012 Report 2 Macroeconomic
Analysis
Tipping Point: How
Changes in Financial
Systems Affect Nations
A Comparative Study of
Australia and
Venezuela’s Economic
Systems
Comparative Analysis of
Monetary and Fiscal Policy
during the Financial Crisis A
Case of the United States &
China
ECON5012 Report 2 Macroeconomic
Analysis
Tipping Point: How
Changes in Financial
Systems Affect Nations
A Comparative Study of
Australia and
Venezuela’s Economic
Systems
GROUP PROJECT REPORT
ON
MACROECONOMICS
“INCOHERENT & COHERENT FISCAL
STRATEGIES:
A CASE OF SPAIN & CHINA”
WORD COUNT – 3,093 words (Excluding cover
letter and References)
0
1. INTRODUCTION:
The report shows the analysis between coherent and incoherent fiscal policies of
China and Spain at the time of financial crisis (2008-2009). The aim of this paper is to
examine the fiscal strategy followed by the Spanish government and Chinese government to
stop the fall of aggregate demand induced by the financial crisis. This paper examines how
incoherently the fiscal policy is being carried out in Spain whereas, Chinese policymakers
quickly responded and recovered.
2. CRITICAL REVIEW OF CHINA:
This article discusses the Chinese policymaker’s macroeconomic response to the
global recession during 2007-2009.
The main aim of the article is to explain the underreported macroeconomic coherence
maintained by Chinese government while implementing various fiscal policies in the crisis
period even though excellent crisis management and authoritarian political system
contributed in quickly implementing the policies.
The article provides detailed information on the china’s fiscal policy during the
recession which includes a massive 4-trillion-yuan fiscal stimulus injection into the economy
over a two year period time , new tax policies, special assistance to SME’s, various subsidies
for household consumption, unemployment assistance programs like encouraging state
owned firms to hire more workers, reducing sales tax on small cars, scrapping income tax on
bank savings , huge increase in bank lending and a well-coordinated expansionary monetary
policy to support fiscal policy measures which compensated for the fall in the demand due to
economic downturn and export contraction.
3. CRITICAL REVIEW OF SPAIN:
This article examines the fiscal policy implemented by the Spanish government
during the great financial crisis (2007-2009) to prevent the fall of the aggregate demand
triggered by the calamity. The aim of the article is to highlight how incoherently the fiscal
policy has been implemented by the Spanish government during the upheaval time. As per
the article, Spain’s economy stands as a classical example among the nations of European
Union to describe the aspect of incoherence while implementing fiscal policy.
1
The article’s first objective was to prove that Spain’s fiscal policy was a failure by
highlighting that the fiscal stimulus implemented during the crisis was more directed in
increasing the disposal income of the households by lowering taxes and how that stimulus
coupled with high degree of uncertainty and with the restrictive monetary policy maintained
by the European Central Bank allowed the households to move their increased disposable
income (Earned through Tax reductions) to savings to take advantage of the ECB’s high
interest rates.
The second objective of the article is to explain how the increase in Spain’s public
expenditure and drop in tax collection due to the fiscal stimulus increased the Spain’s public
deficit over the 3% limit set by EU rules, decreasing the Spanish government’s available
fiscal space, forcing it to implement contractionary fiscal policies without even being able to
exit from the recession
4. COMPARATIVE ANALYSIS:
Prior to Financial Crisis
COUNTRY
BUDGET
SURPLUS
DEBT (%GDP)
YEAR
GDP GROWTH
RATE
SPAIN
2007
1.90%
36.30%
3.77%
CHINA
2007
0.60%
29%
14.23%
Table 1 shows the physical parameters of Spain and China in 2007 (Ferreiro et al 2013).
From table 1, we can see that both the China and Spanish economies were relatively
performing well by looking at their main fiscal parameters in 2007. Both the economies were
maintaining budget surplus with Spain’s surplus standing at 1.90% of GDP and 0.60% of
GDP by china. While Spain’s debt level is at 36.30% of GDP, China’s stood at 29% and
when it comes to GDP growth rate, Spain stood at 3.77% compared to china’s 14.23%.
(OECD2017)
During the Financial Crisis
The make-up of the fiscal policy of China and Spain differed in many ways with
china’s fiscal policy turning into a success while the Spanish fiscal proved to be a disaster.
2
While the Chinese Fiscal policy stood as a good example of Coherent Fiscal Strategy,
the Spain’s Fiscal policy can be considered as a best case to explain on how incoherently the
fiscal strategy is carried out and how it can lead to the disaster.
FISCAL
PARAMETERS
SPAIN
2007
(%)
3.77
4.1
2008
(%)
1.12
-0.4
CHINA
2009
(%)
-3.57
-6.00
Percentage
GDP Growth Rate
Domestic Demand
Household Savings
-0.96
1.57
7.30
Rate
1.94
-4.50
-11.20
Government Deficits
36.20
39.50
61.80
Government Debt
Table 2 physical parameters of Spain and China 2007-2009
2007
(%)
14.23
11.60
2008
(%)
9.65
8.30
2009
(%)
9.4
16.70
35.80
37.32
37.84
0.60
29.00
-0.40
27.00
-2.80
32.60
Domestic Demand:
Spain’s Fiscal policy resulted in the increase in the disposable income of the
households by 3.8% due to tax reductions but the household consumption only grew by 0.1%
(Serrano 2010) at the same time domestic demand fell from 4.1% annual growth rate in 2007
to -6.0 % in 2009 (OECD 2017) whereas on the other side China’s Fiscal policies tax cuts
were more directed towards reducing sales tax on automobiles, providing subsidies to
encourage households to spend more which successfully resulted in increasing the domestic
demand by over 5% from 11.6% in 2007 to 16.7% in 2009 (OECD 2017).
Household Savings Rate:
Spain’s incoherent fiscal policy resulted in increasing the household savings from 0.96% of household’s disposal income in 2007 to 7.30% of household’s disposal income in
2009(OECD 2017)
with households taking advantage of the high interest rates of around
3.5%-4 % offered by European Central Bank(Serrano 2010) whereas as China’s coherent
fiscal policy is successful in limiting the household savings rate to a minimal rise of about
0.5% from 37.31% of household disposal income to 37.84% of the household disposable
income in 2009 (OECD 2017).
Government Deficit:
In 2009, Spain Re-oriented its fiscal policy towards public expenditure through
investments and increased its assistance to the unemployed workers. The decrease in income
3
because of the tax reductions and increase in the public expenditure as a part of fiscal
stimulus resulted in a budget deficit of -11.2% in 2009, -4.5% in 2008 from a budget surplus
of +1.94% in 2007 (BBC 2017) whereas in the case of china the entire 4 trillion yuan fiscal
stimulus is raised by issuing the government bonds by central government which allowed
china to maintain a low level of deficit 2.8% of GDP in 2009 , 0.4% deficit in 2008 and a
surplus of 0.6% of GDP in 2007 (Yee 2012).
Government Debt:
Spain’s Fiscal policy during the recession resulted in the increase in the level of
Spanish government debt from 36.2% of GDP in 2007 to 39.5% in 2008 to 61.8% in 2009
(OECD 2017) whereas China’s fiscal policy hasn’t led to considerable increase in the level of
government debt with only constituting to 29% of GDP in 2007, slightly falling back to 27%
in 2008 before slightly raising to 32.6% in 2009 (Trading Economics 2017)
GDP Growth Rate:
Spain’s fiscal policy during recession failed the promote the annual GDP growth rate
with GDP growth rate falling from 3.77 % in 2007 to -3.57% in 2009 whereas China’s
effective Fiscal policy allowed annual GDP growth rate to stay positive at 14.23% in 2007 to
9.40% in 2009 (OECD 2017)
Outcome of the Fiscal Policy:
Spain’s Ineffective fiscal policy resulted huge government deficit of -11.2% of GDP
forcing Spain government to apply contractionary fiscal policy even before exiting the
recession where as China’s effective fiscal policy is successful in restoring the China’s
economy to pre-crisis level with a GDP growth rate of 10.7 % in the last quarter of 2009 (
Yee 2012).
REASONS TO THE FISCAL POLICY BEING EFFECTIVE IN CHINA AND
NOT IN SPAIN:
Spain adopted procyclical stance while implementing the fiscal policy during the
preceding years before the crisis when it should have taken counter cyclical stance
considering the booming economy during that period(Ferreiro et al 2013).
4
Fiscal Policy
Monetary Policy
Years
2008
2009
2008
2009
Spain
Expansionary
Expansionary
Restrictive
Expansionary
China
Expansionary
Expansionary Expansionary Expansionary
Table 3 shows the Fiscal and Monetary Policy stances in 2008 and 2009 as seen in(Ferreiro et al
2013)
In case of Spain, from table 3, we see that, though their monetary policies for 2008
were restrictive, their fiscal policies were expansionary. The effects of Fiscal Policies greatly
depend on their relationship with monetary policies. The fiscal policies put into effect before
the crises and the monetary policies put into effect around the same time are not coordinated
explaining why the expansionary stance of fiscal policy was ineffective(Ferreiro et al 2013).
In case of China we see a well-coordinated relationship between their fiscal policies
and monetary policies, thus having a positive and significant impact.
Spain and China’s dependence:
Spain is a part of the European Union or EU. So, the monetary policies are set by
ECB (European Central Bank). Spain has no say in them as the monetary policies are set in
all EU countries. Thus, we see Spain as being dependent on ECB(Serrano 2010).
Whereas China is very independent with their monetary policies as their policies are
set by the People’s Bank of China (PBOC). We also see that during the period 2007-2009,
PBOC set lower interest rates than is seen set by ECB(Serrano 2010).
Compositions of the Fiscal Policies implemented by both countries:
The main component of the fiscal stimulus developed by the Spanish government in
2008 was through a series of direct tax cuts which are meant to increase the disposable
income of companies and families (Serrano 2010). While on the other side China’s 4 Trillion
Yuan fiscal stimulus has been implemented more through public expenditure directed
towards the construction of houses for low income urban households; increased spending on
rural infrastructure and boosting rural incomes; expenditures in transportation network
construction; increased investment on medical service; education, and culture; Sichuan postearthquake reconstruction; increased spending on ecology protection; Technical innovation
5
and economic restructuring to boost the domestic demand to compensate the economic
downturn and contraction of the exports.( Yongding and Navid 2008).
Understanding the basic principles of macroeconomics:
We see Spain face a recognition lag and in 2009 they rectify this error. Here, we see a
uncertainty in being able to assess the effects of their decisions. Whereas we can clearly see
that the Chinese policymakers had a good understanding of the principles of
macroeconomics. They were responsive, well – informed, aware and well-equipped and so by
2009 the country was out of recession(Serrano 2010).
Timing:
In the case of Spain, we see the country implementing procyclical fiscal policy when
they should have applied countercyclical fiscal policy(Serrano 2010).
In case of China, due to their good understanding of the principles of
macroeconomics, they could quickly implement the policies developed by their country’s
experts(Serrano 2010).
Political Influence:
An important thing to note would be, that the fiscal policy designed by Spain in 2008
by the central and regional government had an expansionary bias affecting the policy due to
electoral reasons. Whereas in China, having an authoritarian political system made it easy
and quick to take decisions(Serrano 2010).
Thus, based on the reasons above we can conclude that the fiscal policies
implemented in China were more cohesive that the fiscal policies in Spain.
5. APPLICATION OF THEORY:
Fiscal Policy:
The fiscal policy is used for economic growth of a country which stabilizes the rate of
growth through several variations in government spending or expenditure and taxation which
intensely affects national income, employment, prices and output(Curtin University 2017).
6
Objectives:
Fiscal policy is being used to attain the following objectives of any country:
1. To sustain and accomplish full employment.
2. To make the price level stable and balanced.
3. To alleviate the growth rate of the economy.
4. To maintain the stability in the budget and balance of payments.
5. To encourage the economic development of underdeveloped countries(Curtin
University 2017).
Who conducts Fiscal Policy:
Central Government has the authority to conduct fiscal policy which makes taxation
and spending decisions that mainly focus on full employment and production to stabilize the
growth of an economy of a country(Curtin University 2017).
Government’s Fiscal Strategy:
During recessionary period, the Government usually provides strategies which
supports the economy by:
1. Driving off Budget Deficit:
The budget deficit occurs when current expenses exceed the revenue or amount of
income received, which normally happens with slower economic growth. To correct a budget
deficit, nations should go with the reduction on expenditures and must increase revenuegenerating activities, or lead a combination of the two, to recover its deficit in budget.
According to the article (Garcia and Ramajo.2004), it has been said that by viewing
Spanish economy public deficit and interest rates have been positively related which affects
the economic growth of Spain.
2. To Drive Budget Surplus:
By the time the economy recovers, the deficit will fall back and the budget will return
to surplus, means the revenue will exceeds the expenditures and will result in an additional or
surplus of funds.
7
Types of Fiscal Policy:
Following are the two types of Fiscal policies used in the two articles that we have
been working on:
1. Expansionary Fiscal Policy
This policy is used in times of recession, where the government take action to
increase aggregate demand by increasing government expenditure and by reducing taxes in
order to increase the spending of consumers and investors, tax rebates, transfer of money to
encourage the economic growth(Curtin University 2017).
2. Contractionary Fiscal Policy
This policy is used in times of expansion or boom, where the government take action
to reduce growth rate of AD by increasing taxes and by making reduction in government
expenditure to stabilize the growth of economy(Curtin University 2017).
Discretionary Fiscal Policy:
Within our selected articles, Spain used the discretionary fiscal policies as their
government deliberately took actions to achieve its objectives for economic stability by
making changes in expenses and taxes(Curtin University 2017).
Counter Cyclic vs Procyclical:
Spain used ‘procyclical fiscal policy’ which is positively related to the boom timings
or recession period, as when economy activity was high it reduces tax and increase public
spending and in recession times its other way around(Curtin University 2017).
Influence on Aggregate Demand
Expansionary fiscal policy
8
Within Expansionary fiscal policy, the goal is to shift the aggregate demand to the
right by increasing government expenditure, or decreasing taxes, or both. And this will
influence the aggregate demand, when the economy is below full-employment
equilibrium(Curtin University 2017).
Contractionary fiscal policy
Within Contractionary fiscal policy, the goal is to shift aggregate demand to the left
by decreasing government expenditure, or increasing taxes, or both. And this will affect
aggregate demand when the economy is above full-employment equilibrium(Curtin
University 2017).
Time lags:
Time lags is one of the main problem or limitation of implementing fiscal policy of
Spain. Under various kinds of time lag, ‘Recognition lag’ was the main issue which makes
Spain’s policy makers to take a lot of time to identify and addressed the problems which lead
to instability of economic growth(Curtin University 2017).
Government Debt:
Within our articles, the government debt has been clearly one of the important
parameter for differentiating two economy standards.
Government debt is basically a debt that is owned by the central government. The
federal budget would not always be balanced as there are two circumstances at which the
budget goes to either deficit or surplus; as when there is a recession in the economy, tax
revenues fall and government spending rises, there be a deficit in budget or fiscal deficit.
On the other side, when GDP is above its potential level during a boom, the budget
automatically moves into a surplus and the tax revenues rises.
By making stable policies every year, the budget can be helped to get balanced, where
expenditures meet revenues and improve the overall GDP of a country.
6. CONCLUSION AND RECOMMENDATIONS:
9
We suggest that Spain should adopt a substitute fiscal policy which is not solely
involved in reducing budget deficit, the government should also concern about job creation
strategy, developing social policies to transform the economy. Spain should solve several
fiscal challenges which are addressed in attaining a rapid fiscal consolidation and maintain its
sustainability over a long-term period (OECD 2010, 63).
To achieve a sustainable consolidation, the government should cautiously categorize
the most related expenditure limitation to be accomplished in the long-term while rising less
distortive taxes. Besides, the real issues of Spain are not laid in politicians to solve the
reform. Spain has poor public finances which were rooted from private debt issues that
Spain’s households, businesses, and government borrowed up to $1.25 trillion (The
Economist 2012, para 6).
Spanish government should cut the social security tax for unskilled workforces while
rising taxes on property, tightening exemptions to VAT as well as corporation and income
taxes (OECD 2014). Additionally, the indebtedness of private sector should be supported to
reduce its debt levels. Hence, with an active policy, Spain could strengthen the reliability of
their fiscal consolidations and obtain more benefits.
Spain should deal with unemployment rate. It could face the brain drain when highskilled employees leave the country to find job overseas. Hence, the government must offer
training and education for young workforces as well as assist to search jobs. The dual system
of vocational education could be a possible solution for Spain which lasts three years and
both schools and companies will share the responsibility in training program (García 2011,
18). This approach will help employees to access the essential knowledge and specific skills
for related jobs.
China should have more active fiscal policies to reach the goals of reform and balance
the economy in a long term. The policy should cover a rise of income security that support
the retirement fund structure (Bernanke 2016, para 14). This approach would contribute to
encourage consumer confidence and boost the consumption.
Besides, tax system should be concerned to have a reform such as rising the central
government budget’s portion in social expenditure and decreasing the local government’s
fiscal burden (Waray and Lommen 2013). The government should have more approaches on
10
progressive tax system to lessen tax burden for poorer individuals. Nevertheless, the
government should deliberate progressive tax carefully that it will raise critical opinions from
high-income earners. Moreover, tax credits could be applied to boost disposable income
which assist disadvantage taxpayers as well as offer impartial tax code for individuals or
businesses.
China should diminish the budget deficit and decrease the national debt which create
room for expansionary fiscal policy in the future. Hence, it would help China to gain the
budget balance in a long term. Besides, China should consider improving the fiscal
transparency of local governments (Lin 2011, 111). If the central government allows local
levels to have its own rights to release new taxes, this approach should be controlled by the
local individuals.
11
REFERENCES:
Ferreiro, J., Gómez, C., & Serrano, F. (2013). Mistakes in the fiscal policy in Spain before
the crisis. Panoeconomicus, 60(5), 577-592. Retrieved from
https://search-proquestcom.dbgw.lis.curtin.edu.au/docview/1449169287?accountid=10382
Serrano, Felipe. 2010. “The Spanish fiscal policy during the recent “great recession.” Journal
Of
Post
Keynesian
Economics 32,
no.
3:
371-387. Business
Source
Complete,
EBSCOhost (accessed May 25, 2017).
Yongding, Yu, and Naved Hamid.2008 “China’s Economic Growth, Global Economic Crisis
and China’s Policy Responses [with Comments].” The Pakistan Development Review 47, no.
4: 337-55.
http://www.jstor.org/stable/41261228.
Trading Economics.2017. “China Deposit Interest Rate “.Tradngeconomics.com. Available
from
http://www.tradingeconomics.com/china/personal-savings
BBC. 2017. “Eurozone In Crisis Graphics: Deficit”. 2017. BBC News.
http://www.bbc.com/news/business-13366011.
Yee, A. S. (2012). China’s macroeconomic response to the global recession: Ideational
sources and substantive contents. Asian Perspective, 36(1), 1-42. Retrieved from
https://search-proquestcom.dbgw.lis.curtin.edu.au/docview/1010324039?accountid=10382
OECD.2017.”Domestic Product – Domestic Demand Forecast – OECD Data”. 2017. Theoecd.
https://data.oecd.org/gdp/domestic-demand-forecast.htm.
Bernanke, Ben S, “China’s trilemma—and a possible solution.” Brooking (blog). March 9,
2016,
12
https://www.brookings.edu/blog/ben-bernanke/2016/03/09/chinas-trilemma-and-apossible-solution/
García, Juan Ramón. 2011. “Youth unemployment in Spain: causes and solutions.” BBVA
Research.
https://www.bbvaresearch.com/KETD/fbin/mult/WP_1131_tcm348-270325.pdf
Lin, S. 2011. “China’s Fiscal Policy and Fiscal Sustainability.” In Ito, T. and F. Parulian
(eds.), Assessment on the Impact of Stimulus, Fiscal Transparency and Fiscal Risk, 77-116.
ERIA.
http://www.eria.org/publications/research_project_reports/images/pdf/y2010/no1/ch3
China_Fiscal_Sustainability_Shuanglin_Lin.pdf
OECD. 2010. OECD Economic Surveys: Spain 2010. OECD Publishing.
https://books.google.com.au/books?id=l0fBkZ1KPxEC&pg=PA65&lpg=PA65&dq=p
referential+VAT+rates&source=bl&ots=2MTWDfBdR3&sig=2ZKS6urrt8wKKUUz
KRqyxZYnRwA&hl=en&sa=X&ved=0ahUKEwi906S4iYvUAhUIp48KHd7dB6EQ6
AEITzAH#v=onepage&q=preferential%20VAT%20rates&f=false
OECD. 2014. “OECD Economic Surveys Spain.” OECD.
https://www.oecd.org/eco/surveys/Spain-Overview-2014.pdf
The Economist. 2012. “How to save Spain.” The Economist.
http://www.economist.com/node/21556238
Wray, L. Randall, and Yolanda Fernandez Lommen. 2013. “Monetary and Fiscal Operations
in the People’s Republic of China: An Alternative View of the Options Available.” ADB
Economics Working Paper Series.
https://www.adb.org/sites/default/files/publication/31111/ewp-380.pdf
Yee, Albert S. 2012. “China’s Macroeconomic Response to the Global Recession: Ideational
Sources and Substantive Contents.” Asian Perspective 36 (1): 1-42.
13
https://search-proquestcom.dbgw.lis.curtin.edu.au/docview/1010324039?accountid=10382.
Curtin University. 2017, “Fiscal Policy”, Lecture 10, Power point presentation.
Adam, Klaus. 2011. “Government Debt And Optimal Monetary And Fiscal Policy”.
European Economic Review 55 (1): 57-74. doi:10.1016/j.euroecorev.2010.11.003.
Fiscal Policy: Meaning, Objectives And Other Information | Article On Economics. 2017.
Yourarticlelibrary.Com: The Next Generation Library.
http://www.yourarticlelibrary.com/economics/fiscal-policy-meaning-objectives-andother-information-article-on-economics/29231/.
García, Agustín, and Julián Ramajo *. 2004. “Budget Deficit And Interest Rates: Empirical
Evidence For Spain”. Applied Economics Letters 11 (11): 715-718.
doi:10.1080/1350485042000236593.
14
ECON5012 2023 Report Marking Rubric
Components
Weight
Critical review of article 1
out of 5
Review
•
5.Critical
Conclusion
and recommendations
review
of article 2 = 5
•
6. Presentation of the report orally = 5
Analysis
•
Total = 35
•
out of 5
Comparative Analysis of both the articles for
two different countries
out of 10
Application of theory to the analysis = 10
out of 10
Total = 35
Conclusions
• Total = 35
Implications and/or policy recommendations
(follows logically from the information in the analysis)
Score (Out of 35)
Comments (strengths, shortcomings, suggestions):
out of 5
Final Mark
Out of 35
Your Mark
Macroeconomics: L6
GDP, Unemployment, Inflation
ECON5012
Important macroeconomic measures, such as gross domestic product, unemployment and
inflation enable economists to evaluate the performance of an economy.
Report 2
You have to select 2 research papers choosing 2 different
countries published in referred academic journals (peer
reviewed) related to topics studied in MACROECONOMICS.
The possible topics could be
GDP
Unemployment
Inflation
AD and AS model
Monetary Policy
Fiscal Policy
International Economics
Microeconomics v/s. Macroeconomics
•
Microeconomics is the study of consumer
behavior, producer behavior, how the
consumers and firms make choices and how
they interact in markets.
▪
Macroeconomics is the study of the economy
as a whole, including the explanation of
concepts such as Inflation, Unemployment,
real GDP and Economic Growth.
▪ Macroeconomics is a study of the
National Aggregates
(see ABS website click on ‘Key National Indicators’)
3 Learning Objectives
1. Economic Growth & GDP
2. Unemployment
3. Inflation
Part A
Part B
Part C
For each of the above, you will need to know the following:
– definition of concept;
– how the indicator is measured;
– the implications (good or bad) on society;
– shortcomings (i.e. some limitations of the measure).
4
GDP and Economic Growth
GDP (Gross Domestic Product) is the market value of all
final goods and services produced in an economy during a
given period of time.
• Nominal GDP: sum of the current value of final goods and
services.
• Real GDP: a measure of the volume of final goods and
services, holding prices constant.
• Real GDP per capita: Real GDP / Population.
▪
Economic growth: expansion of society’s productive
market potential.
▪
Business cycle: Alternating periods of economic expansion
and contraction: recovery → upswing → boom → peak →
downswing → recession
▪
▪
Expansion: period of a business cycle during which total production
and total employment are increasing.
Contraction: period of a business cycle during which total production
and total employment are decreasing. [Or growing at a very slow rate –
rate of growth is contracting]
6
Gross domestic product (GDP)
measures market-based production
●
Gross Domestic Product (GDP): The market value of
all final goods and services produced in a country
during a given period of time.
GDP does not include the market value of
intermediate goods and services (goods used as inputs,
such as a tyre on a truck).
GDP includes only current production. GDP does not
include the value of second-hand goods.
Economic growth rate: The rate of change in real GDP from one year
to the next.
7
Calculating GDP
Examine a simple economy (Economy X) which produces only three (3)
goods: sunglasses, suntan lotion and swimmers. Use the information in the
table below to calculate GDP for this economy.
Production and Price Statistics for Economy X
Product
Quantity
Price per unit ($)
Sunglasses
1,000
20
Suntan lotion
500
10
Swimmers
100
80
8
Calculating GDP
Production and Price Statistics for Economy X
Product
Quantity
Price per unit ($)
Value ($)
Sunglasses
1,000
20
20,000
Suntan lotion
500
10
5,000
Swimmers
100
80
8,000
TOTAL (or GDP): $33,000
9
Methods of measuring GDP
• Australian Bureau of Statistics (ABS) uses three (3) alternative
methods to measure GDP:
• Production Method: The sum of the value of all final goods
and services produced in an economy during a period of time,
say one year
▪ Expenditure Method: The sum of the total expenditure on
final goods and services by households, investors, govt. and
net exports (Y=C+I+G+NX)
▪ Income Method: The sum of the income generated from the
production of goods and services, including profits, wages and
other employee payments, income from rent and interest
earned.
GDP Components (Exp. App.)
The ABS divides GDP into four major
categories of expenditures:
Components of GDP include:
Y= C + I + G + NX
▪ Consumption (C)
▪ Investment (I)
▪ Govt. Expenditure (G)
▪ Net Exports (NX) or (X-M)
GDP = C + I + G + X – M
Consumption (C): Spending by households
▪
▪
▪
▪
Non-durable goods – e.g. food, clothing
Durable goods – e.g. furniture, fridges, TVs
Services – health, education, leisure
Investment (I) includes 3 categories:
▪
▪
▪
▪
Business fixed investment – spending by firms on new factories,
office buildings, machinery, computers
Inventories – goods produced but not yet sold
Residential investment – spending by households on new housing
12
Components of GDP (expenditure method)
▪
Government spendings (G): Spending by federal,
state, and local governments on goods and services.
▪
Can be divided into government current spending (G1)
& government investment spending (G2)
▪
▪
Note: spending on transfer payments is not included in
GDP
Net exports (‘NX’, also known as X – M): value of
exports (X) minus expenditure on imports (M).
▪
▪
Exports are included because it is domestic production
Imports are subtracted because it is foreign production
13
Example- Components of GDP in 2016/17, reference year for chain volume
measures is 2015–16
Components of GDP, 2016/17 ($ millions)
993,674
Consumption
334,416
Investment
409,605
Government
Net Exports
337,046
Exports
374,571
Imports
-37,525
Total (X – M)
1,694,483
TOTAL GDP
Source: 5206.0 Australian National Accounts: National Income, Expenditure and Product (Dec 2017, p.65);
note the Statistical discrepancy (E) of about $5,689.
14
GDP – Latest Trends for Australia (2023)
Real GDP versus nominal GDP
▪ It is important to separate a measured rise in GDP that may be
due only to price changes from real quantity changes.
▪ Nominal GDP: The market value of final goods and services
evaluated at current year prices.
▪ Real GDP: A measure of the volume of final goods and
services, holding prices constant. i.e. the market value of final goods and
services evaluated at base year prices.
16
Real GDP versus nominal GDP
⚫
Nominal GDP can change over time due to changes
in price and/or output.
⚫
Real GDP shows changes in output only.
▪ The ABS selects a reference (base) year and uses this
over a specified period. Nominal GDP is ‘deflated’ to
remove the effects of inflation. The result is real GDP.
17
Calculating Nominal GDP (simple illustration)
▪
Our economy produces only three goods. We can calculate real
GDP for this economy in 2019, assuming 2018 is the reference
year.
2018
Product
Qty
Sunglasses
2019
Price per
unit ($)
Value
Qty
1,000
20
20,000
Suntan Lotion
500
10
Swimmers
100
80
Total
Price per
unit ($)
Value
1,500
25
37,500
5,000
550
11
6,050
8,000
110
80
8,800
$33,000
$52,350
Calculating Real GDP (simple illustration)
2018 (reference year)
Product
Price per unit $
2019
Quantity
Value (PxQ)
Sunglasses
20
1,500
30,000
Suntan Lotion
10
550
5,500
Swimmers
80
110
8,800
REAL GDP: $44,300
▪
Calculate real GDP for 2019 by multiplying the prices of each item for
2018 times the quantity of all three goods for 2019, and then summing
the three values.
Calculating the economic growth rate
‘Economic growth rate’: the rate of change in real GDP
from one year to the next.
Economic Growth =
Real GDPCurrent year – Real GDPPrevious year
x 100
Real GDPPrevious year
Example: Real GDP for Australia was:
In 2015/2016: $1,659,604 million
In 2016/2017: $1,694,483 million
Real GDP growth rate
= (Year2 – Year1 / Year1) x 100
= 2.1%
20
Long-run economic growth is a key to rising living standards
An important goal for any economy is to improve living
standards over time.
⚫
Real GDP per capita is used to measure changing
living standards over time.
Real GDP per capita = real GDP/population
⚫
An increase in real GDP per capita effectively means
that each person on average can consume more
goods & services.
21
Can money buy happiness?
Does GDP measure what we want it to m
