Growth and Development in the Global Economy - Example

Growth Economics Course Code and Name Professor’s Name University Name City, State Date of Submission Growth Economics Introduction Economic growth can be defined as the increase in value of commodities (goods and services) produced by an economy. In economics, the term “economic growth” refers to the increase of potential output of a given country (BLOCH 2003). The potential output is measured in terms of production at “full employment” which arises due to growth in total spending in an economy. Growth is usually calculated in real terms e.g. labour-adjusted terms so as to net out the actual effect of variables such as labour, inflation and employment on the price of commodities produced. In determining the economic growth of a given country, real GDP per capita is often used as it indicates the average standard of living of individuals in that country while economic growth indicates the increase in average standard of living (REBELO 1992). This research paper aims at comparing the economic growth rate of Australia to that of U.K. in the long-run. It considers the economic factors that have positively or negatively affected the GDP of these two countries over a period of 30 years and above. The paper looks into the stastical estimates and techniques used to measure economic growth, analysis them and gives reccommendations to increased growth in Australia. Theory/Model When comparing the growth rates across countries, one can either use mathematical techniques or the level of real GDP in these countries. GDP is the most widely used indicator in comparing economic growth rates. However, it does not take into consideration factors such as pollution, distribution of wealth in a country, education and health e.t.c. Due to these deficiencies; it should only be viewed as an indicator and not an absolute scale (KENYON 2001). In our comparison, nominal GDP data will capture changes both in the price of commodities and the volume of output in each country. One of the mathematical techniques used to measure long-run growth rate is the compound growth rate formula expressed as (DOWRICK 2004); G = (V/A)1/n - 1 () Where; G is the compound growth rate V is the price estimate of GDP in year 2 A is the constant price estimate of GDP in year 1 n is the difference between Year1 and Year 2 Another method that can be used is to measure year to year changes in constant price GDP, sum them and then divide by the number of years that have lapsed in order to get the mean value of GDP. Yearly change enables one to assess the general trend of economic growth. In determining a country’s long-run growth rate the following formula is very useful (BLOCH 2003); Y (1 +g) n = 2Y Where; Y is constant price GDP. g is the long-run annual growth rate of constant price GDP. n is the number of years. Empirical Findings This paper will compare the following key economic growth indicators: GDP per capita, human capital and unemployment level. (i) Comparison of GDP From 1970 to 2006, the Australia’s long-run growth is 3.21% p.a. This puts Australia above U.K. which has a long-run growth of 2.35% p.a. This shows that Australia’s economy is doing well relative to major economies of the world. GDP in Australia at current US$, int.$ and Real GDP growth Australia GDP, current prices, billion $US GDP, current PPP dollars, bln. Real GDP Growth, % 1998 380.5 472.0 5.1 1999 412.1 498.4 4.1 2001 377.4 551.1 2.6 2002 423.6 582.0 3.9 2003 539.1 612.9 3.1 2005 732.1 690.3 3.1 2006 778.0 731.8 2.7 2008 1054.6 825.8 2.5 2011 1488.2 914.5 2.0 Source: World Economic Outlook The table above shows year by year GDP of Australia from 1990 to 2011. To determine the average growth rate we sum up the yearly real GDP and divide by the number of years. That gives 3.26% average annual growth rate. The lowest annual growth rate having been at a low of -1.1% in 1991 and highest in 1998 at 5.1%. The chart below on the other hand, shows constant price GDP in the UK from the year 1948 to 2003 as well as the rate of economic growth from year to year. The average annual percentage change is 2.53% with annual growth rate varying from a low of -2.08% in 1980 to a high of 7.12% in 1974 (REBELO 1992). Comparing the two countries in terms of GDP, we find that Australia is doing much better than UK. Source: Economic and Labour Market Review (ELMR), National Statistics The economic recessions experienced in the global market have adversely affected the growth rate of most countries. An economy experiences a setback as people purchase less due to low salaries or lack of unemployment. This in turn results to slowed rate of production and consequently major losses to firms as the prevailing market conditions leaves them with no option but to sell their products at low prices. Some firms are even pushed out of the market when they are not in a position to meet their cost of production. It is observed that in the year 1981 and 1991, both Australia and UK experienced a negative growth rate. This was caused by economic recession that affected the global market around that time. In both cases, UK was more affected compared to Australia because its main feature of economic growth is international trade. When inflation hits the market, the trade sector is usually the most affected. Both high interest rate and inflation were the major contributing factors of the 1981 economic recession while the high value of the pound forced high interest rates in 1991 resulting to another recession. It is observed that the economic growth was high in the 1980s. These brought about a boom and bust as major economies were unable to contain the rate of growth. In addition, inflation rate increased to over 11% and as a result governments increased interest rates in an attempt to lower the spending. Notable effects of recession are low purchasing power of the people, increase in unemployment as firms are unable to pay them, low stock prices and an increase in national debts. (ii) Human capital Human capital is a key factor in economic growth. It refers to the economic aspects of knowledge and experience among the working population. UK surpasses Australia in terms of capital accumulation. It’s even a major donor to most humanitarian organizations. Technological advancements go in hand with human capital. Over the past few years, technological progress has become vital towards economic growth. Statistics show that technology progress between Australia and UK are almost at par. Though UK manufactures most technological products, international trade has made such products available in most parts of the world at a fast pace. Trade between Australia and Asian countries especially Japan and China has enabled adoption of high technology in the whole of Australia. The available literature on growth accounting emphasizes more on traditional factors of growth such as capital and labour with little attention on technological progress. It is a fact that new ideas are usually the source of growth because they result to innovation and long-run productivity improvements. This means that more resources should be dedicated to education, science research and technology with the aim of nurturing the ideas of young people for innovative development. New technology generates more jobs and makes trade more efficient as production and operation costs are reduced. However, some people argue that technology lowers the need for human capital as most work can be done by machines. Investing more in research and productivity will generate high skilled workers who are competent enough to promote growth in any given country and consequently create more wealth for its economy. Other factors remaining constant; an increase in capital stock results to proportional increase in economic growth (DOWRICK 2004). This results in the increase of assets of a given country. From the graph below it is observed that, Australian stock market varies from time to time indicating the countries level of investment at a particular period. As for UK, the level of investment is observed to be high with value of assets gradually increasing year after year. This maintains its capital accumulation at a high level. UK capital stock Sources: ELMR, National Statistics The labour force of a country is very important in facilitating a positive trend in economic growth. It consists of people above the stage of 15 who are either participating in labour or in search of employment. Since 1960s the population of female workers has continued to increase in developed countries such as US and Germany and later in Australia. This has been a big boost to economic growth as women form the larger proportion in any population. During the early 19th century especially during the world wars, very few women used to work as they were unable to handle both their marriage and work. The introduction of family planning methods and amendment of laws that were an obstacle to women development has enabled their full participation in building the economy. (iii) Unemployment rate The unemployment rate refers to the number of unemployed population relative to the labour force (employed population + unemployed but seeking work). Unemployment rate is also a good indicator of determining whether a country is operating at its full capacity. According to graph below the unemployment rate of UK stands at 8.3% while that of Australia stands at 4.9%. this shows that more labour capital is being wasted in UK as compared to Australia. For a country to achieve a tremendous economic growth the rate of unemployment should always be maintained at a low level (DOWRICK 2004). High unemployment rate not only results to loss of labour but increase in dependency ratio as the unemployed have to depend on their relatives for basic commodities. Australian economy is one of the fastest growing economies in the world. Over the past few years, Australia has shown an increasing economic growth relatively higher than that of European and western economic giants. Some professionals have projected that Australian economy is likely to overtake most top economies by 2018 if it maintains its high rate of economic growth (BLOCH 2003). This shows that Australia’s future economy stands stable relative to big economies. What distinguishes Australia from other economies is its ability to maintain the unemployment rate at a low percentage while at the same time introducing policies aimed at increasing citizen’s wealth rather than the government. Another factor that is vital to economic growth is population size. Though there has never been a clear-cut on whether population growth increases or decreases the rate of growth of a country, most developed countries experience low rate of population growth as compared to their economic growth. Some people argue that high population exerts pressure on natural resources hence diverting public resources to maintaining social amenities rather than increasing their earnings. Others argue about the positives such as increased economies of scale and competition that eventually triggers innovation. I believe a controlled population growth like that of Australia enables the economy to grow in proportion to population growth hence lowering the occurrence of dependency as well as enabling the workforce meet their levels of career especially the women. A country whose economic strategies are in phase with expected population growth stands a good chance of social development without stressing the limited resources. Increase in population results to a large workforce if at all employment is available. This will facilitate high production and expanded market. As a result of the world wars, many economies almost collapsed as huge amounts of capital had been allocated to fund the war. During this time, both Australia and UK faced a negative trend in their economic growth though this did not last long as these countries were able to source labour and technological innovations which helped them recover their initial trends (KENYON 2001). Australia had natural resources that in addition promoted economic growth. In times of recession, most economies experience a retarded growth. Australia is not an exception but it’s able to cope up with the situation through market regulation in regard to exports and imports. Unlike UK which focuses more on manufacturing and external investment, Australia’s economic growth has been boosted by service industry and economic incentives such as capital accumulation, saving assets and less spending by government and its citizens (REBELO 1992). The government has employed policies aimed at investing on its citizens through good housing and infrastructure, well paying jobs, good health care and quality education. To achieve higher growth, Australia should focus more on research and innovation as well as opening more avenues to international trade especially with western countries. This will increase its market size for its export while innovation will enable it to manufacture its own goods and lower its dependency on machinery and equipments from Europe. Australia’s economy can be attributed to various economic theories. For a country to achieve high growth rate it has to focus on capital formation, investing in its people in terms of health, education and shelter. In addition, economic policies employed by the government will determine the level of trade and investment (KENYON 2001). Conclusion The economy of Australia stands a good chance now and in the future. The fact that it has focused on service industry such as transport and distribution of commodities has put it in an advantageous position as more countries are now shifting from primary and secondary sectors to service sector. UK mainly depends on international trade and that is the reason its more affected by recession and inflation. Though the GDP of UK is high than that of Australia, positive and promising trends are observed in the growth of Australia’s economy as deviations are minimal and growth almost constant. In the long-run, the economy of Australia is expected to have grown remarkably though this will depend on whether Australia works on diversifying its sources of income to ensure that incase one sector collapses the avenues can hold the economy. However, tertiary sector (service sector) comprises of a wide variety of opportunities as it is a sector that has not been fully utilized. In comparison to UK, Australia’s GDP has mainly been contributed by the service industry which accounts for 68% of GDP while mining sector represents about 20% of GDP (BLOCH 2003). For Australia to maintain its economic growth, more funds ought to be channeled to better service delivery and expansion of its service firms to cater for the global market. References List BLOCH, H. (2003). Growth and development in the global economy. Cheltenham, UK, Edward Elgar. BLOCH, P. H., & KENYON, P. P. (2001). Creating an Internationally Competitive Economy. Basingstoke, Palgrave. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=203639 DOWRICK, S., PITCHFORD, R., & TURNOVSKY, S. J. (2004). Economic growth and macroeconomic dynamics: recent developments in economic theory. Cambridge, U.K., Cambridge University Press. REBELO, S. T. (1992). Long Run Policy Analysis and Long Run Growth. Cambridge, Mass, National Bureau of Economic Research. http://papers.nber.org/papers/w3325. Read More