Gross Domestic Products - Essay Example

GPD comprises of the sum of consumption, investment, government spending and net exports (exports less imports). GDP or Gross Domestic Products varies each year depending for many reasons such as economic and non-economic factors. Economic factors include some changes in government policies such as taxes and interest rates. Non-economic reasons include factors such as war, drought, natural and man-made disasters. The real measurement of a country's GDP is termed as real GDP wherein the level of a gross domestic product after changes in inflation has been taken into account. Nominal GDP on the other hand is the current market value of a country's gross domestic product. The countries real GDP is affected by inflationary movements. Inflation however can mean either an increase in the money supply or an increase in price levels. When we hear of inflation it generally mean to the rise in prices compared to the country's benchmark. If the stream of money supply increased it usually manifest it in higher price levels. In the United States, the standard measurement of inflation is the core Consumer Price Index (CPI) a government-issued index of the retail prices of basic household goods and services excluding food and energy because these goods show more price volatility than any other elements of CPI. There is a direct relationship of GDP and inflation to each other. An annual growth on GDP is a positive sign for stock market investors. If the economy is sliding or merely holding steady most companies will not gain any profits which is the main receptacle of stock performance. When GDP is performing spectacularly this is also dangerous to the economy as it yields to higher inflation. With this event, most economists sought to determine a standard GDP growth for 2.5-3.5 %. But these factors may not fully fulfill without considering one of the most leading economic indicators, the employment rate. Labor comprises 2/3 of the total production costs for businesses. When unemployment rate falls to full employment, there is a build up labor shortages. As a result thereof, producers that is on the verge of expansion find new workers to be increasingly scarce. They are now forced to add cost overtime and offer higher wages to attract non-labor force members to work resulting to upward slope pressures. When wage increases it would yield to higher production costs, thereby producing higher prices of goods and services and also increases in the inflation rate. To station an equilibrium, unemployment rate must be consistent with the full employment rate. The interaction of supply and demand is a vital part of macroeconomics, consumer's ability to adapt price changes and employers increasing the prices of commodity may have several implications triggering the either inflation or stagflation. If consumer's are cannot keep pace on the increasing price commodities, inflation may occur, however if employers are passing their labor cost index on consumers aiming to generate profit through price increase on commodities yet consumer can still cope up with the changes, stagflation occurs, where business did not gain anything and yet did not have any single loss. To illustrate further, we have to examine the country's GDP of two of the world's most prosperous nation, Australia and United States. For over the past years, Australia' economy has displayed worthily, however in 2006, it began to decline yielding only 2.5 % in real GDP. Drought, inflation, high oil prices and economic deceleration attributed to the decreased in real GDP. (Economic and Social Survey of Asia and the Pacific 2007). Domestic demand brought for the country's thrust. Domestic demand comprises of business investment. High capacity utilization and high corporate profits served as a catalyst in the growing business investment in Australia. Capacity utilization refers to the amount pf physical capital available to firms that is in use. Firms are given ample stock of capital equipment such as machinery, office spaces, factories, computers and telecommunications as aid of the workers in the production of goods and services. If full blown capacity utilization was employ which resulting to speedy process in the production of goods and services, high proceeds for the firms are expected. In the year 2004, Australia's GDP constituted to employment of 70 % labor force, this is a good indicator of the economy's success. (Ibid.) Business investment also deals with the performance of export goods. Neighboring Asian countries are potent partners of the country. By the year 2000-2005 exports to China increased to 22 % and exports to India amounted to 30 %. In the recent years, Australia was determined to shift away from Europe and North America to Asia, this important decision was became somewhat successful. Australia's adhering on its present policy makes for China her second largest export partner. International trade was favorable on Australia's part owing to high commodity prices, yet this event also cause for increasing inflation rate as it soared 3.6 % in 2006 compared to 2.7 % in 2005. For policy makers, inflation is medium-term average rather than hard-edged target band; this is because inflation can be restrained through monetary policy decision that shall be casting by the Reserve Bank Board. One of the many highlights of Australia is their teeming oil reserves. As according to Oil and Gas Journal (OGJ), Australia has 1.6 billion oil reserves as of January 1, 2007 mostly found in Western Australia. (Country Analysis Briefs. 2007). The consumption for oil comprises to 925, 000 bbl/d of oil, thereby decreasing the net imports to 362, 000 bbl/d or 39 % of to the total of consumption. Mining also brings an impact on the growth of GDP. Exports on agricultural products attributed also to the growth in net exports. In comparison to the United States, their country's GDP has rose 3.9 during the year 2004, 3.5 in the year 2005 and an estimated $13.84 trillion in the year 2007. By the year 2007 Australia has A$1 trillion. The comparison of the two largest nation shows that the United States has more gain rather than Australia. United States growth was a collective growth gains in consumer spending, business fixed investment, and, to a lesser extent, housing investment, inventory accumulation and government spending. The chart below illustrates the oscillation of the country's GDP, the line indicates the change in Australia GDP and the blue indicates the CPI from 1970-2006. Table 1. Australia GDP (Country Analysis Briefs. 2007) Similar in the case of Australia, business investment ranked as the leading contributor of GDP's growth, and even that is true with the United States, this includes now export. The United States leverage was the same significant as the other countries are expecting. The United States still own the title as one of the leading exporters in the world. The country's international trade relations extended outside the bounds of North America and concentrated to different areas around the globe. Australia's import from the United States amounted to 1.74% having a cumulative percentage of 75.37%. Because of the risks of competition, Australia has confined herself within the Asia, while United States spread throughout the globe. One advantage of Australia to United States is that Australia has large oil reserves, which comprises the import commodities of the United States. Furthermore, Australia is one of the few countries in the Organization for Economic Cooperation and Development (OECD), countries that is a net exporter of energy. Also Australia is the world's exporter for coal which other industrialized countries demand for. In the year 2004 the net imports of oil is 12.097 million barrel/day, for natural gas it is 120.6 billion cu m. hence United States is more likely to be needing more oil each day, yet Australia's people were the primary concern rather than other people's territory. It is evident in the report stated above. During 2003 United States inflation rate was generally low, and as expected the inflation increased during the year 2004, as there is a great demand on energy. Consumer energy prices have increased to 17.0 % especially on petroleum based energy. Also it is expected that the annual growth of the GDP will be projected to 3.2 % every year, being drawn in the year 2005. However, to compare the two countries, the GDP of the United States is greater than Australia. The United States oscillates in the first, second or third position in the largest GDP growth in global countries. United States GDP can maintain and achieve growth for every year. The following graph shows the GDP increase of United States for a decade in billions. Table 2. US GDP 1996-2005 (Dmitry, 2006) Australia on the other hand is on fourteen or fifteen rank both in the years 2003-2007. This shows that Australia's GDP is a mile long for her to surpass United States. But Australia has a far greater edge especially on their natural resources like energy, agricultural products, coal and mining. The graph below is a comparison on growth rate of US GDP versus Australia's GDP. Table 3. Graphical representation of data for US and Australia GDP (Dmitry, 2006) List of References Country Analysis Briefs. (2007) Energy Information Administration Australia [online] available from [19 August 2008] Dmitry (2006), US GDP [online] available from [19 August 2008] Economic and Social Survey of Asia and the Pacific (2007) UN Economic and Social Commission for Asia and the Pacific [online] available from [19 August 2008] Statistical Abstract of the United States (2006) 2006.U.S. Census Bureau [online] available from [19 August 2008] United States of America (2005) APEC Economic Outlook Read More