Economics for Business Group Assignment
GDP Comparison Between Australia and China
GDP COMPARISON BETWEEN AUSTRALIA AND CHINA
Gross Domestic Product (GDP) is one of the commonest measures of gauging the economic performance of a nation. Layton et al. (2008) define the GDP as the market value of the sum of all services as well as goods produced within the geographic borders of a given nation over a given period of time, usually a year. The authors further explain that the GDP does not take into consideration the second-hand or intermediate goods but takes care of only new products or final goods made available for the ultimate user. In addition, Khanchi (2012) observes that the GDP does not include stocks or bond transactions carried out by the citizens of a given country but it entails the production value in all markets for resources, products, consumers, businesses and workers. To understand the GDP, we need to first of all think of the various sectors that make up the economy and this is better done using economic flow models (Layton et al., 2008). One of such models is the Circular Flow Model that constitutes product markets on one half and factor markets on the other half. Product market looks at the flow of money between local households and businesses where supply and demand forces dictate the quantity and prices of goods as well – often without government interference. On the other hand, factor markets take care of the cash flow between the business enterprises and households. In this scenario, the firms demand prolific resources from the households then, in turn, make factor payment in form of wages for labor services. Another common model used in determining the GDP, is the Four-Sector Circular Flow Model where part of the household income is taxed, another part spent on importing oversees goods, and the rest saved (International Monetary Fund, 2015)
In determining the GDP of a particular nation, the expenditure or income approaches are common. According to Layton et al. (2008) the expenditure approach gives the cumulative amount spent on all final goods over a certain period of time whereas the income approach gives the sum of all factors of production. Either way, conceptually, the results remain the same, approach notwithstanding. In the year 2015, the global economy continued to recover backed up by deficit spending stimulus; central banks injecting money into respective economies; declining oil prices and low interest rates (International Monetary Fund, 2015). Within the broad positive picture, however, there were significant downside risks which affected most of Australia’s key trading partners. Notably, production in Australian economy is purchased through spending from businesses, households, foreigners or even the government. In Australia, about 60% of the GDP component is household expenditure (Smith, 2015). The largest trading partner – Peoples Republic of China – faced a myriad of economic challenges during the last one year. This is because as the country was transiting towards a strong consumer base, its initiatives were greatly complicated by a slowdown in economic growth and the bursting of stock market’s bubble.
On another front, China’s domestic conditions seemed to have the potential to considerably alter demand for the Australian exports. Smith (2015) notes that after a three-decade period of astronomical expansion, China’s economy slowly but surely started edging towards moderation by sliding to below 7% in the year 2015. China’s economic meltdown could have been attributable to tough policy measures embraced by the government of China in bid to control financial vulnerabilities during the delicate transition to consumer-focused economic growth model. As at the end of the year 2015, the total Chinese debt had risen to more than 200% of the GDP (International Monetary Fund, 2015). However, the enormous debt emanated from the government efforts to promote domestic investments following the previous decline in economic fortunes as a result of financial crisis experienced across the globe. Commonwealth of Australia (2015) explains that the economic slowdown in China could have been explained in two ways. To start with, the uncontrolled growth in real estate market created unprecedented volatility leading to fears that homeowners as well as developers could face massive losses. Secondly, the exponential growth that characterized the Chinese stock market elicited sharp corrections in mid-2015 when equity values, reportedly, had already fell by about 30%. It was the resultant uncertainties that led to the downgrading of forecasted GDP growth rates from 6.8% to 6.3%. Generally, the ongoing volatility and declining growth outlook presents a very distinct risk to the global economy.
On the other hand, the Australian economy is still under transition as observed by the International Monetary Fund (2015). The phase of investments resulting from commodity boom have all but passed with the mining sector shifting its focus to production activities. The total goods and services produced by the Australian economy in 2015 only are valued at 1.6 Trillion dollars. Moreover, the vast majority of the Australian people, about 80% of its population, are employed in service industries with the distribution segment taking the lion’s share. Additionally, over the past one decade, the service industries have had their respective share rising by 2.5% driven by strong business and social services. On the contrary, the share enjoyed by agriculture, manufacturing, fishing and forestry sectors have consistently been on a downward trend (Commonwealth of Australia, 2015). International Monetary Fund (2015) cautions that though mining has also tried to edge up over this period, the figures reflecting its share remain relatively low than earlier anticipated. Consequently, the changes in industrial GDP shares, across Australian economy, point to serious structural changes.
On the positive side, however, a lowering Australian dollar has greatly improved the country’s export competitiveness by guaranteeing cheaper sales of the country’s exports in foreign currencies. Over the last one year, the Australian dollar has been subjected to steady but gradual decline taking off significant pressure from the exporting industries. This means well for the Australian economy. According to Commonwealth of Australia (2015) increased direct trade with China has contributed about 6% of Australia’s GDP since out of every 58 Australian workplaces one is directly involved with exports to the Republic of China. Besides, the direct exports to China are also providing employment to about 200,000 Australian people even as the latter’s economic growth shifts from resources to other sectors.
Commonwealth of Australia, 2015. Australian Industry Report, 2015. Department of Industry, Innovation and Science
International Monetary Fund, 2015. Asia and Pacific Stabilizing and Outperforming Other Regions. International Monetary Fund, Publication Services, Washington, D.C.
International Monetary Fund, 2015. Regional Economic Outlook:
Bolstering Resilience amid the Slowdown. International Monetary Fund, Publication Services, Washington, D.C.
Khanchi, M.S., 2012. Business Economics- Meaning, Nature, Scope and significance, Introduction and meaning. Macmillan Publication, London
Layton, A., Robinson, T. Tucker, B.I., 2008. Economics for Today. Holmes Institute
Smith, S., 2015. The 2014 Australia-China Trade Report. Australia-China Business Council