Economics Monetary Policy For Business GDP Essay

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Discuss about the Economics Monetary Policy for Business GDP.

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Introduction

This essay pertains to the comparison of Australian economy with United Kingdom’s economy. Both these countries are economically advanced and developed economies in the world. Australia and United Kingdom experience continuous economic growth and have high per capita income as compared to other countries. High Per capita income presents the high living standard of people in these countries. The financial position of these countries is also strong and stable among developed countries. Furthermore, the GDP is an important determinant for a country’s economic growth. While the economy of Australia depends on its mining sector that contributes greatly in the growth of the country’s GDP, the economy of United Kingdom depends on service sector that affects its GDP growth rate. Moreover, it is not only the type of economic activity that affects a country’s GDP, but factors like natural resources, capital formation, human resources, technology, political factor, exchange rate, inflation rate, unemployment rate, and demographic factors also have an important bearing on the growth rate of country’s GDP. These factors directly and indirectly affect the GDP of a nation. The factors natural resources and capital formation are the principle factors of nations GDP that directly affect to the economy. Additionally, the developed technology and skilled human resources support to the growth of per capita GDP.

The following essay compares the GDP of Australia with United Kingdom by comparing past 5 year data related to unemployment rate, inflation rate, export, import, population, and service sectors. Moreover, it analyses the impact of these factors on Australia and United Kingdom’s GDP growth rate.

Comparison between the GDP of Australia and United Kingdom (UK)

GDP is the monetary value of a nation’s all finished goods and services in a specified time of period. It is also known as economic output of a nation. Generally, GDP is calculated on annual basis and can be calculated on quarterly basis. This term is commonly utilised as a pointer of economic condition of a nation as well as measure of the nation’s standard of living (Coyle, 2014). Moreover, it is used to compare the efficiency of various nations with high accuracy.

The Australian economy is a symbol of stable and strong financial system with continuous growth. This country’s economy is featured as low unemployment, low public debts and contained inflation (Fan et al, 2012). Australia has experienced a continuous growth of its economy for over 20 years until 2012, with a compound annual growth rate of 3.5%. The demand of resources and energy from Asia has increased the growth of commodity export and created channel for resource investment. On the other hand, UK is the second largest economy in Europe with a leading financial sector and trading power. In recent years, the government of the nation amplify the social welfare programs and diminished public ownership of business enterprises for economic growth. Both of the country’s GDP is very high in the world. The GDP of Australia was $1.62 trillion in 2015 with 12th rank in the world and 2.16 percent of the world economy. The GDP of United Kingdom was $2.84 trillion in 2015 with fifth rank in the world and constituted 4.59 percent of the world economy.

Furthermore, the GDP of UK is higher than that of Australia but at present, the annual GDP growth rate of Australia is higher than that of UK, which presents better future development of the Australian economy. The graph given below shows the trend in the GDP of Australia and UK:

Graph 1: GDP of Australia and UK (Source: Trading Economics, 2016)

The above graph presents that in 2012 the annual GDP growth rate of Australia was more than UK’s annual growth rate. However, in 2013, it decreased from 3.5% to 1% due to compression of mining industry (Trudinger et al, 2013). This is because Australia’s economic success depends on mining sector that contributes 13.5% of total GDP of the nation. Furthermore, at present time the annual GDP growth rate of Australia increased as compared to UK’s GDP growth rate.

Moreover, the Australian economy was relatively unaffected by global financial recession in 2008, because the banking system of this country remained strong and the inflation was controlled (RBA, 2016). Australia exports energy products, natural resources, and food to many countries that supports its economy. The diverse and abundant natural resources like uranium, natural gas, coal, copper, iron, gold and renewable energy resources of Australia attracts foreign investment. In addition to this, the quality of human resources of this country also supports the growth of GDP in terms of high employability among its citizens. However, the 2008 global financial crisis sharply affected UK’s economy in terms of higher public debts, declining home prices, reduction in human capital and higher commodity prices. Hence, this economic slowdown created many problems for UK’s economy and pushed the economy into economic recession.

The per capita income is a measure of standard of living of the country. In Australia, the per capita income is higher than that of UK. The cost of living in Australia is cheaper as compared to UK that means the people have more spending power with increased cash flow. The growth rate in GDP per capita presents the growth rate of labour’s productivity, proportion, and participation. In 2016, GDP per capita of Australia is USD 56,327 and GDP per capita of UK is USD 43,734. This shows that the productivity and participation of labour in Australia’s economic growth is higher than UK. The improved standard of living because of better-paid jobs attracts people from whole world. The unemployment rate in UK is less than Australia’s unemployment rate. This is illustrated with the help of below graph:

Graph 2: Unemployment Rate of Australia and UK (Source: Trading Economics, 2016)

The above graph compares the unemployment rate of Australia and UK. This graph shows that before 2013, the unemployment rate of Australia was low in compare of UK’s unemployment rate. But after 2014 the unemployment rate of UK continuously decreased and the Australia’ unemployment rate increased sharply. This is because the cyclical demand of services in Australia decreased while the supply of services increased which resulted in the slow employment than supply of labour (RBA, 2016).

The inflation rate of Australia is higher than UK’s inflation rate. The inflation rate in 2016 of Australia is 1.10 percent and in UK, it is 0.80 per cent. The comparison between these two countries is described in following graphs:

Graph 3: Inflation Rate of Australia and UK (Source: Trading Economics, 2016)

The above graphs show that the inflation rate in Australia in 2012 was approximately 3 percent, which continuously decreased and reached at its lowest point, 1.10 percent in 2016. However, in UK, the inflation rate decreased sharply as compared to Australian inflation rate and reached 0.80 percent in 2016.

In Australia, the working population is 66.26 percent of total population and in UK 64.47 percentage of total population is working capital. Hence, the total working population in Australia is more than UK’s total working population. Therefore, in Australia economic activities are more than UK’s economic activities, which results in higher GDP growth rate of Australia in comparison to UK. Additionally, the GDP of a nation measures total economic output within the country’s border, gross national income, and net income from foreign investments (Brezina, 2011). The gross national income of Australia is $1.31 trillion, which is low as compared to UK’s gross national income. But the gross national income per capita of Australia is higher than UK’s gross national income per capita which presents that the internal resources of Australia have more value as compared to United Kingdom’s internal resources. Moreover, the population growth rate of Australia is 1.34% and 0.81% of United Kingdom. The higher population growth rate presents that the economic activities in Australia is more than United Kingdom’s economic activities which supports to its GDP growth rate.

The value of imported goods and services in Australia has the value of $284 billion, which is 21.2 percent of its GDP. It exports goods and services of $238 billion which is approximately 19.38 percent of total GDP of the country. On the other hand, the value of imported goods and services in United Kingdom is $838 billion which is equal to 29.4 percentage of its GDP. But the exported goods and services of this country have the value of $728 billion which is approximately 27.4% of its GDP. Therefore, Australia imports less goods and services in comparison to United Kingdom, which supports its value of currency and economy. Moreover, Australian business environment is conducive to do business and stood at 13th rank in the world but in recent years it becomes difficult to start a new business in the country. However, UK stands at 6th place in the world in terms of ease of starting and doing business.

Factors affecting GDP in Australia and UK

GDP is one of the determinants of country’s economic growth. GDP of a country represents the value of goods and services produced in a specified period. It measures national income and output of country’s economy during a given period. GDP of Australia is 1.56 trillion USD and GDP of UK is 2.678 trillion USD (The World Bank, 2016). Many factors like natural resources, capital formation, technology, etc. affect GDP of an economy.

Natural Resources

Natural resources are the principal factor affecting GDP of the economy. Natural resource includes the area of land and soil quality, oil resources and minerals, river system, and climate. Australia is a rich country in terms of natural resources and it is a major exporter of wheat and wools, minerals such as gold and iron, and energy product in forms of natural gas and coal. Hence, natural resources constitute 5% GDP of Australia economy. In the other hand, production of minerals is now declining in UK (Trading Economics, 2016). Since 2004, UK has been a net importer of the natural resources that is negatively affecting its GDP.

Capital Formation

Capital plays a crucial role in raising the level of production that influences the GDP growth rate. It includes building, machinery, power, land, medium of communication and transportation. No development plan will work in a country unless a minimum rate of capital formation is realized. Further, capital formation increases capital per labor which in turn increases the labor ratio. With more capital formation labor productivity increases, that ultimately improves the growth of the economy. Gross fixed capital formation of Australia decreased from AUD 99,669 million to AUD 99,642 million in 2016. On the other hand, gross fixed capital formation of UK increased from GBP 77,059 million to GBP 78,159 million in 2016 (Trading Economics, 2016). Hence, capital formation play major role in the constitution of GDP growth rate in an economy.

Human Resources

Human resource is a very important factor that affects the GDP of an economy. The quality and quantity of human resources directly affects the growth rate of the economy. Human resource quality depends upon the skills, knowledge, education, creativity and training. Hence, if the human resources of the country are well skilled and knowledgeable then output produced from them will also be of high quality. Productivity growth of the Australia is strong because it added wide range of policies to increase the GDP rate in economy. In Australia, improvements in the quantity and quality of human resources lead to support the higher per capita GDP. However, in UK many economists are worried with the reduction in human capital that affects their employment and GDP.

Technological Development

Technology refers to a type of technical instrument that may be use by certain amount of labor with the help of some scientific method and techniques. Technology is an important factor that affects the GDP of an economy. With the help of technological development, countries are able to improve their productivity even if there are limited resources. Further, countries that work in the field of technological development progressed rapidly as compared to the countries that have less focus on the technology. On the contrary, an improper or outdated technology results into high cost of production. Australian digital economy is rapidly growing and it has been valued at $79 billion and 5.1% of GDP (Deloitte, 2016). It is expected that the Australian digital economy will achieve value of $139 billion in 2020 (7.3% GDP). However, UK’s digital economy will be contributing 12.4% of GDP of UK by 2020. Among many countries, UK’s digital economy contributes the largest proportion of GDP.

Political Factors

Political factors play important role in GDP growth rate of economy. A political factor involves the participation of government for implementation and formulation of different policies that act as an important aspect in GDP formation. In Australia, Reserve Bank of Australia formulates and implements monetary policies. Monetary policy helps in maintaining the full employment level in Australia and it focuses for the welfare of the people (Reserve Bank of Australia, 2016). A stable political environment in Australia is crucial to maintain the GDP growth rate. On the other hand, political environment of UK is unstable that may reduce investment and GDP. The same has been happening in UK after the 2008 financial crisis.

Exchange rate

Exchange rate is a determinant of country’s GDP and GDP is influenced with the fluctuation in exchange rate. An effective exchange rate is considered as a sign of economic growth. Due to the mining boom in Australia, exchange rate directly contributes in the higher demand for natural product. Higher mining investment increases the supply in other country. Over the period of last 10 years, with the affect of mining boom exchange rate has been estimate 44% higher in 2013 (Reserve bank of Australia, 2016). However, exchange rate of UK is a cause for the slower GDP rate because net export fall and it increases the demand for import.

Inflation rate

Inflation refers to increase in the supply of money or increase the price level in an economy. If inflation is low, then companies should try increase the production. Thus, the overall rate of GDP growth increases. Increase in GDP attracts more and more investor to invest in stock market because they are attracted to the profitability of the companies. On an average inflation rate in Australia is 5.12% from 1951 to 2016 (RBA, 2016). This inflation rate of Australian economy is low and it does distort the economic decisions. Fluctuations in inflation rate directly affect the monetary policy of the government. Inflation rate of UK rose from 0.3% to 0.5%. The impact of this is prominent in rising airfare and petrol cost, which in turn will affect the level of economic activity in UK. Many economists are forecasting that inflation rate will hit 3% in 2017 (Independent, 2016).

Unemployment

Unemployment is the determinant of standard of living and it is measured by GDP growth rate of the country. Unemployment happens when people lose their jobs and it reduces the living standard and increases psychological stress. It is important to know the degree of unemployment because it affects the output of the economy (Mosikari, 2013). Australia has higher minimum wages (US$7.25/hr) and lower unemployment (7.2%). On the other hand, there is an economic impact of immigration on the employment as well as GDP of UK. Non-EU workers immigration into UK has an inverse impact on the UK-born employee. In UK, some sectors have suffered with Non-EU workers such as IT industry. Due to the recession, it has registered a weak economic growth and flexible labor market.

Demographic factor

GDP growth rate depends on the income from productivity and changes in the workforce population. In case of UK, population expected to increase by 9.7 million over the next 25 years. Due to the growing population, productive capacity of UK will increase. Moreover, population of UK is increasing due to the immigration and higher birth rate. With regard to increase in labor force in UK, it will help to increase the GDP rate as compare to other countries (Reuters, 2016). On the other hand, Australia has a higher population growth as compare to other high-income nations. Reason behind this a high level of immigration. It concludes that higher population of Australia improves the level of productivity and GDP.

Conclusion

From the above discussion, it can be concluded that the economy of Australia and United Kingdom is highly developed and advanced in world economy. The GDP of these countries is known as strongest GDP in the world with strong and stable financial position. It is also concluded that the GDP of United Kingdom is much higher but the growth rate of Australian GDP is higher than UK. Australia is abundant in natural resources and is capable to produce enough energy that attracts foreign investment in the country. The capital formation and labour productivity of Australia supports its economy significantly. Due to better resource quality and wide range of government, policies the economy of Australia was protected from global financial crisis but United Kingdom’s economy got affected thereby leading to reduction in capital formation and increased unemployment rate. Furthermore, the political environment in Australia is stable which supports its economy and GDP growth. But the United Kingdom is facing the unstable political environment. The exchange rate and inflation rate of Australia are also better than UK and favorable for the growth of country’s economy. At last, it is evaluated that the Australian economy has the capabilities for further global growth.

References:

Brezina, C. (2011) Understanding the Gross Domestic Product and the Gross National Product. Australia: The Rosen Publishing Group.

Coyle, D. (2014) GDP: A Brief but Affectionate History. Australia: Princeton University Press.

Deloitte (2016) Australia’s digital economy grows. [online]. Available at: (Accessed: 28 September 2016).

Fan, J. P., Titman, S., and Twite, G. (2012) An international comparison of capital structure and debt maturity choices, Journal of Financial and quantitative Analysis, 47(01), pp. 23-56.

Independent (2016) Business news. [online]. Available at: (Accessed: 29 September 2016).

Mosikari, J.T. (2013) the Effect of Unemployment Rate on Gross Domestic Product. Mediterranean Journal of Social Sciences, vol. 4(6) pp. 429.

RBA (2016) Financial stability. [Online]. Available at: (Accessed: 29 September 2016).

RBA (2016) Increase in the Unemployment Rate. [Online]. Available at: (Accessed: 28 September).

Reserve bank of Australia (2016) effect of mining boom on income [online]. Available at: (Accessed: 29 September 2016).

Reserve bank of Australia (2016) Inflation Target. [online]. Available at: (Accessed: 29 September 2016).

Reserve bank of Australia (2016) What are the Objectives of Monetary Policy [online]. Available at: (Accessed: 28 September 2016).

Reuters (2016) the demographic effect. [online]. Available at: (Accessed: 29 September 2016).

The world bank (2016) GDP growth (annual %). [online]. Available at: (Accessed: 29 September 2016).

Trading Economics (2016) Australia Gross Fixed Capital Formation. [online]. Available at: (Accessed: 28 September 2016).

Trading economics (2016) Australia Unemployment Rate. [Online]. Available at: (Accessed: 29 September 2016).

Trading Economics (2016) United Kingdom Gross Fixed Capital Formation. [online]. Available at: (Accessed: 28 September 2016).

Trudinger, P. A., Walter, M. R., and Ralph, B. J. (2013) Biogeochemistry of Ancient and Modern Environments: Proceedings of the Fourth International Symposium on Environmental Biogeochemistry (ISEB) and, Conference on Biogeochemistry in Relation to the Mining Industry and Environmental Pollution (Leaching Conference), held in Canberra. Australia: Springer Science & Business Media.

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