GDP Calculations in the UK - Coursework Example

?Question b For the purpose of this assignment, macroeconomic data of United Kingdom has been selected. Given the Nominal GDP, GDP Deflator and the Population; Real GDP, Real GDP per capita, Real GDP growth rate and Real GDP per capita growth rate have been calculated. The real GDP figures computed are taken in millions of national currency of UK. However, for real GDP per capita, absolute figure has been taken in this respect showing national currency per person. Real GDP The overall macroeconomic picture of United Kingdom looks quite bright as the country remained successful in increasing the real GDP growth until 2008 recession which hit the country hard and after almost two decades, the country experienced negative growth in terms of real GDP. Before this recent negative growth rate in GDP, the country in question experienced negative growth in real GDP in 1991 once again due to economic recessionary period. The above chart shows the performance of real GDP of United Kingdom. As it can be seen quite clearly that the country managed a sustainable increase in the real GDP especially experience high growth in the period of 1980-90, but the real GDP showed disappointing results just after 90’s. After the 1993, the country again started to climb highly in terms of real GDP till 2008 recession. Since 2008 recession, the country’s real GDP growth is the slowest in the past 40 years. Real GDP per capita Real GDP per capita of United Kingdom has also remained increasingly stable even though the population of United Kingdom has also increased. But the country has managed to cover the effect of population increase as well as increased the real GDP alone. In a nutshell, the real GDP per capita of United Kingdom increased in almost in the same manner as that of total real GDP even though the real GDP per capita also incorporated the increasing impact of population. The above chart represents the overall performance of real GDP per capita of United Kingdom. It can be noticed that there are slight downfalls in the curve but the overall curve possesses an increasing trend until the 2008 recessionary period. Since then, the real GDP per capita is on a declining trend mainly due to decrease in the total real GDP supported by the increase in the population. The percentage growth rates for real GDP and real GDP per capita have also been calculated. It can also be observed that growth rate of real GDP has experienced an increasing trend in the period of 1970 – 2009 with the exceptions of initial few year of 70’s, 1991 and lastly 2008. In those mentioned years the macroeconomic growth of United Kingdom remained negative due to the economic depression all around the world. Similar patterns can also be observed with real GDP per capita of United Kingdom in the period in question. Real GDP per capita seems to track its origin i.e. real GDP and followed it almost every year. It can be summarized the United Kingdom has been well above the positive real GDP in the past 40 years which is a good indicator of its overall macroeconomic progress. Question 2 The tools used for measuring the economic activity has considerable pitfalls and these measures do not provide a true insight of the economic progress of any country as well as lack in terms of accuracy despite of being used as the most frequent measures of economic progress. The following discussion will encompass the different areas which are neglected by GDP approach of measuring economic activities of any country. Market value of the economic activities only One of the major limitations of the orthodox way of measuring GDP is that it only accounts for the market values of the goods produced by the economy. In this way, it does not consider the non-market activities which also add to the increase of production in the country. The non-market activities have different forms. Commonly used examples include the home chores done by the households including husbands, wives and other family members as their activities are not considered as productive to the economy. Other common but very important example of non-market activities is the production of illegal goods. No doubt, they are illegal but they contribute sufficient amount of production in the economy. For instance, due to smuggling only, the goods produced by the economy increases tremendously. There are countries in world which generate around 25% of the overall GDP in respect of only illegal goods produced. These illegal goods should also be considered while measuring the overall economic progress of the country. Negative Externalities The economy produces those goods in the economy, the manufacturing and/or consumption of which, creates significant externalities. The most common example is that of consumption of those goods which hamper the environment and surroundings and make them highly populated. So when economic activity related to those goods is measured, the value of those goods is added to GDP but the harms that they cause to the environment are ignored. In this way, the conventional way of measuring GDP does not account for the environmental damages due to the production/consumption of those goods. Effect of unused natural resources In the measurement of GDP, only those goods are considered which are produced as well as those consumed by the economy. However, in case of a country having unused natural resources in the form of forests, minerals, metals and other natural assets, the country has a strong likelihood of exploiting all these resources and bring them under its GDP. In this way, the slow growth rate of GDP can be improved. Depreciation of Machinery Another pitfall of the GDP measurement tool is that it incorporates the effect of depreciation of machinery in the computation of the GDP such that it includes all the types of investments being made into the country, some of which are invested in order to replace the old machinery that has been already depreciated. In this way, the new machinery does not add to the total value of goods produced rather it just replace the old machinery with the new ones. Human Capital and Knowledge The value of knowledge and human capital does not have any tangible nominal value but those countries which generate good human capital tend to exploit the positive externality of education and thus increase the overall production of the goods. However, the worth of their knowledge and capabilities cannot be taken as nominal values due to which the traditional measure of GDP is unable to incorporate their effects in the contribution towards economic progress. GDP per capita – A Poor Measure GDP per capita is used by many economies, but this measure demonstrates quite poor comparison among different countries. For example, a country is highly populated but the producing the same level of goods as other countries with less population are producing, the high populated country would be considered as a disappointing economy whereas in reality, the economic activity is the same but the population is making the difference. As a result, this measure misleads the analysts in judging the economic progress of different countries. Alternatives to GDP There are various alternatives that have been developed to replace GDP measurement tool including Purchasing Power Parity (PPP) index which takes into account the different particular parameters of a given economy, market conditions as well the business environment. Another tool developed to measure the economic activity is that System of National Accounts (SNA) which is developed by the mutual efforts of UN, IMF, World Bank, OECD and other bodies. World Bank has also provided a framework to consider natural resources in the overall production of the goods in the economy of a particular country. Question 3 Briefly explain what the Solow growth model predicts regarding the sources of long term economic growth in an economy. Given these predictions, what possible macroeconomic policies might be appropriate for encouraging economic growth? Solow Growth Model Solow growth model is a category of economic models especially designed and predicts long term economic growth. This model is a class of neoclassical economics. The purpose of neoclassical economics is to study the long run economic growth by analyzing different parameters like capital accumulation, productivity, technological progress and population growth. Predictions of Solow Growth Model The predictions of Solow Growth Model are Conditional Convergence for instance if there are two countries which posses same infrastructure, parameters and economic structure then the country having small initial capital will outperform the one which has large initial capital. Eventually, both countries will congregate at the same point where the level of output per head and level of capital per head will be same. The reason behind this phenomenon is the “Diminishing Marginal Product of Capital”. In other words, the country having low initial capital will be more productive in utilizing its capital than the country which has larger initial capital. The predictions which Solow Growth Model envisages are: 1. If the state of stabilization is achieved, there is no constant growth. 2. The more an economy reaches a state of stabilization, the more growth rate starts getting reduced. 3. Underdeveloped countries should grow faster than the developing or developed countries. The above predictions determine the overall rate of growth of privileged and underprivileged countries. These predictions also show the conditional convergence which means that all of the countries converge at same steady state eventually. The first prediction states that, “If the state of stabilization is achieved, there is no constant growth”. This statement has been true for most of the countries but nowadays it is getting obsolete. The statement supports the idea that if a country has reached its saturation or maturity point, then there will not be any further growth. In real world, that’s not the case. The reason is in today’s dynamic environment, businesses and countries have to keep pace with the changing technology. If they aren’t pursuing for growth and they aren’t moving forward, then they are getting backward. But this statement is valid for businesses and MNCs, because after doing a lot of expansion, diversification and acquisition, there comes a stability point from where the businesses do not have any further chances of growth and their sales, output units and costs become constant. The second prediction states that, “The more an economy reaches a state of stabilization, the more growth rate starts getting reduced”. This statement is another form of the first prediction which means that the steady states lead to the decline in the growth. This statement has been somewhat discussed earlier, where the notion of moving backward and forward was explained. It means that if the countries aren’t moving forward for growth, then essentially they are moving backward in a way that other countries are moving forward and in this way they are ahead of those countries which are not moving forward. The third prediction states that, “Underdeveloped countries should grow faster than the developing or developed countries”. This statement is quiet controversial. Poor countries can grow faster than the developed countries because developed countries already have built infrastructure and stabilized economic structure. In contrast to that, there is lesser development in poor countries. The idea of third prediction is that poor countries should grow faster because they have loads of opportunities available and if these opportunities are taken positively and met appropriately, then there are substantial chances of poor countries to grow much faster than the developing / developed countries. In order to do so, poor countries require immense amount of resources but when these resources are available and are utilized adequately then there is huge potential of growth for poor countries. Policies for Long-run Economic Growth By analyzing, Solow Growth Model, it becomes evident that long run economic growth can be achieved by “Human Development”. It means that if opportunities are provided to each individual to grow and each individual grows in terms of skills, productivity and efficiency then there are substantial chances for overall economy to grow in long run. Otherwise, the expansion, merger, acquisition and diversification will ultimately reach steady state where no more expansion, merger/acquisition and diversification will be required. (Kibritcioglu and Dibooglu, 2001). Human Development is a great way to improve the GDP growth in long run as well and when GDP would increase then it is a sign of the growth of overall economy. This is a single phenomenon which can lead to long run growth, apart from this all the policies and strategies will lead to a steady state of economy in long run. References Beyond the Basic Solow Growth Model, Part. [online] Available at: http://emlab.berkeley.edu/users/webfac/wood/e100b_f06/lecture7.pdf [Accessed 4th March 2012]. Khan, George A., 1992. Policies for long-run economic growth: a summary of the Bank's 1992 symposium. Economic Review 4, p. 31-43. Kibritcioglu, Aykut and Dibooglu, Selahattin, 2001. Long?Run Economic Growth: An Interdisciplinary Approach. Urbana: University of Illinois. Lecture 2 The Solow Growth Model. [online] Available at: http://www.montana.edu/econ/gilpin/502/lect2.pdf [Accessed 4th March 2012]. Problem Set 6: Economic Growth (II). [online]. Available at: http://personal.lse.ac.uk/fetzert/teaching/ec102/problem-set-6-sol.pdf [Accessed 4th March 2012]. Read More