ECON 1012 Principles of Economics : Gross Domestic Product

GDP represents the gross domestic product of a country. It measures the monetary value of the entire production of goods and services that occurred within the geographical boundary of the country at a specified time, say a quarter or one financial year (Mankiw 2014). GDP evaluates the economic health of a country. Nominal GDP shows the value at current prices, while real GDP reflects the value adjusted for price changes.

The nominal GDP of Australia and India for the year 2015 and 2016 are represented in the table below. It is seen that, the value of the GDP at current USD (billion) for Australia is much lower than that for India. The GDP for both the countries have increased in 2016 than in 2015.

Table 1: GDP of Australia and India, 2015-2016, (Current US $, billion)

(Source: World Bank 2017)

(Source: World Bank 2017)

The factors affecting the GDP of a nation belong to the demand side and supply side factors. The factors in the demand side represent the consumer spending factors and the ones in the supply side refers to those influencing the production capacity.

The major sector contributing the GDP of Australia is the mining sector, followed by the service sector, although the contribution of the service sector is considerably lower than the mining and resources sector. In the last 25 years, Australia has seen positive growth and it was not hit by the global recession. The factors affecting the GDP growth of Australia are:

• Lower commodity prices: as the demand for iron ore and crude steel fell in China due to weak housing market; hence, export for these products fell in Australia. Terms of trade also declined. There is excess supply in the domestic market leading to lower commodity prices.
• The level of unemployment is quite higher in Australia. The growth is visible only in the resources sector. Other sectors do not display much growth. Thus, there is fall in production as well as in aggregate demand in the economy. The slow growth of non-resource sector leads to fall in jobs. At the same time, lower wages of the workers results in lower consumer spending. It affects the GDP of the country negatively (Daley and Wood 2015).
• There has been positive growth in the services sector like tourism and education and non-resource sectors in the last few years, which is reflected in the increase of the GDP from 2015 to 2016 (Jericho 2017).

The GDP of India is much higher compared to the GDP of Australia. The factors affecting the GDP growth of India are as follows:

• The capital flows from the local and global investors are steady. Along with that, the stock market is also thriving, which helps in gaining capital. The currency is overvalued when there is a steady flow of capital (Nathani et al.2016).
• The ranking of the RBI plays a major role in managing the balance of payments for India. Hence, the assessment by the RBI determines the status of the economy if it is growing or not.
• The major sectors of India are manufacturing, industry and service. Due to the huge population, the aggregate demand is always higher in the economy. Hence, production is always higher to meet the huge demand in the domestic as well as in the international market, leading to higher GDP. However, service sector contributes majorly than the other sectors. Outsourcing of jobs from the other countries to India plays a significant role in the growth of GDP (Sherekar, Tatikonda and Student 2016).
• The flow of FDI also contributes positively in the growth of GDP (Saini, Madan and Batra 2016).
• The larger imports of oil affect the GDP of the country. High prices of oil lead to higher rate of inflation and that result in overvaluation of the currency. It reflects in higher nominal GDP.

In the table and graphs below, comparisons are made between the unemployment rate and inflation rate respectively for both the countries for 2015 and 2016.

 Table 2: Unemployment rate of Australia and India

(Source: World Bank 2017)

(Source: World Bank 2017)

It is evident from the above graphs and tables that, unemployment rate and inflation rate are affected by GDP and vice versa. When GDP rises, usually unemployment rate and inflation rate falls, as it happened in case of Australia in 2015 and 2016. Although the case if different for India. The inflation rate remained at 4.9% for both the years and unemployment rate increased in 2016 than 2015, although GDP has increased. Hence, the growth of GDP was not affected by the inflation and unemployment rate.

It can be said that the factors affecting the GDP of both the countries are structurally different.  While in Australia, the service sectors, like tourism and education are growing along with the resource sector, in India, manufacturing and service industry are growing. However, the overall growth of GDP is higher in India than in Australia.

References

Daley, J. and Wood, D., 2015. Fiscal challenges for Australia. Grattan Institute

Jericho, G., 2017. Australia's GDP has risen again. [online] the Guardian. Available at: https://www.theguardian.com/business/grogonomics/2014/sep/05/australias-gdp-risen-six-things [Accessed 9 Jun. 2017].

Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.

Nathani, N., Bhatnagar, V., Singh, P., Sharma, U., Tiwari, S., Khan, H., Maurya, A., Navratan, K.N. and Agarwal, N., 2016. Macroeconomic Factors Affecting Foreign Exchange Market in India. Research to Manuscript, p.67.

Saini, A., Madan, P. and Batra, S.K., 2016. Growth Perspective of India Related to FDI Inflows. IJE, 10(1), pp.87-94.

Sherekar, V., Tatikonda, M. and Student, M.E.C.M., 2016. Impact of Factor Affecting on Labour Productivity in Construction Projects by AHP Method. International Journal of Engineering Science and Computing, 6.

World Bank, 2017. GDP (current US$) | Data. [online] Data.worldbank.org. Available at: https://data.worldbank.org/indicator/NY.GDP.MKTP.CD [Accessed 9 Jun. 2017].