A Sustainable Economic Model - Case Study Example

The economic development of a nation is very well dependent on various contributory factors which work together to take the nation forward. The objective of this essay is to closely analyze these factors and to suggest an economic model which would contribute towards the development of a nation. These factors are being viewed within the perspective of different nations like USA, EU, Russia and Germany Gross Domestic Product (GDP) Gross Domestic Product (GDP) is the total market value of the final products produced and the services offered by a country in a given set of period. This value is equal to the total of the spending by the consumer, investors and the government added with the value of the products and services exported after deducting the total value of imports. Gross Domestic Product is usually considered as a valuation of the national economic growth. It is often used to compare the economic performance to aid as a prediction tool and to analyse the business cycles and the recessive and expansive economic performances within them. This further aid economic and fiscal policy formulation of the government and is also used to analyse the consumer behaviour and the economic phenomena involved. (Heakal, R. 2008).These figures can be a benchmark to compare economies of different nations and the economic prediction process is also made possible. A usual pattern of assessing the Gross Domestic Product is to have an initial GDP report on every quarter which is an advance report. Two corrective reports follow this before the final figures on GDP are arrived at. It usually takes two months on this reporting process before a final report is formulated. It is often found that the advance reports are able to create remarkable impact in the market. (Heakal, R. 2008). The GDP numbers are reported in two different levels, of which one is with reference to the current rate of performance of the national currency. However this form of representation makes it difficult to analyse the current economic scenario in the country with reference to other time periods as the chances of inflation hinders this possibility. The second mode of representation more or less solves this problem as it takes into consideration a standard rate of the national currency which makes the comparison easier and it gives a proper standard of reference. These modes are termed as Real GDP and Nominal GDP respectively. In totality Gross Domestic Product is the count of the national output and considered to give an overview of the country’s economy at a certain point of time. (Heakal, R. 2008). It is usually considered that when a nation marks a rise in Gross Domestic Product, the concerned nation would perform economically better than other nations. However the reality is that mere performance in terms of Gross Domestic Product may not make a country outperform another nation with lower Gross Domestic Product. The case of the economy of the United States has provided real time evidence for this fact. The GDP of the United States has always marked growth in the history averaging about 2.5-3% per year but with substantial deviations. (Heakal, R. 2008). The Gross Domestic product graph of the nation showed an upward trend in the first quarter of 2008, which accounted to 0.6 percent. This trend was in continuation with similar growth trends indicated in the last quarter of 2007. However the realistic situation proved the projections to be wrong. There were clear indications of the beginning of recession in the United States as reported by a different methodology of economic indication. The methodology of National Bureau Economic Research which used monthly indicators from the national accounts against the variables of employment, industrial production, real sales and real income to determine the actual dates of economic cycles. This methodology clearly indicated that recession began in America in early 2008, when the indications of Gross Domestic Product was still showing growth in the national economy (Generex, F & Vachnon, H 2008,p.457-464). This system was more inclusive of minute details than in the case of Gross Domestic Product. This very incident is a proof that the performance of Gross Domestic Product alone is not an efficient tool to measure the economic performance of a nation. Gross Domestic Product as an indicator of national economic performance has many limitations. The most important drawback of Gross Domestic Product is that the figures provided by the initial reports on GDP can be extensively inaccurate. With relevance to the non realistic timing and the lack of live reporting, the figures for the GDP for current season turns to be a mere rough estimation(Pattanayak,P, 2008,p.10-21). Despite this inaccuracy, the initial reports on Gross Domestic Product can make substantial impacts in the market affecting the financial process and eventually influencing the national economic performance. The considerate area of GDP is only the value of goods and services produced within the geographic boundaries of the nation. This methodology of economic evaluation fails to include the value of nation’s products and services which are produced and offered across the border. It also does not include the non market and the non mainstream economic activities and also does not reflect the nonofficial economic products. In totality it is not the actual measure of the nation’s well being as it does not consider the realistic factors affecting the nation like variables of employment, industrial production, real sales and real income. The values on Gross Domestic Product can only be considered as a review material aiding the macroeconomic analysis. Despite these disadvantages, Gross Domestic Product in combination with other statistical economic indicators can effectively contribute towards the economic performance of the nation. Gross National Product (GNP), Inflation, Demand, Unemployment, Net National Product (NNP), National Income, Personal Income and Disposable income when considered along with Gross Domestic Product can give a more precise figure on the nation’s economy and can prove efficient in comparing the performances of different national economies. (Heakal, R. 2008).These indicators have complex relationships with each other and are proportionally linked. Gross National Product & Net National Product When Gross Domestic Product includes only goods and services produced within the geographic boundaries of the country regardless of the nationality of the producer, Gross National Product includes the products and services delivered by people and firms from the nation itself, but also includes the goods and services produced by the nation’s companies and individuals outside its geographic boundaries as well. When the allowances for domestic consumption are reduced from the Gross National Product, the Net National Product is derived. Another important factor which should be analysed along with Gross National Product & Net National Product is the Foreign Direct Investment (FDI) made by different countries. It would be ideal to compare the relative FDI of different countries and the way it accounts to the performance of the respective economy. In the referral period between the years1995 to 2004, it has been found that the FDI of United States along with the European Union has shown similar trends of development in FDI whereas Japan’s FDI was falling steadily from 1995 to 2000 Vogiatzoglou K, (2008, p.140-160). However, there are limitations in considering FDI as the lone indicator of economic development as this highly depends on factors like the GDP of the host nation, the market extendibility and accessibility of the host nation along with the human recourse quality of the host nation Vogiatzoglou K, (2008, p.140-160). In general it can be concluded the quantum of FDI reflects the trends in the economic development of the host nation. Unemployment The macroeconomic analysis has to include a survey on the unemployment rate because it is a direct reflection of the economy and its impact on the nation and its people. Ideally, in a higher performing economy, the rate of people from the available pool of manpower who are not able to find a job must be low. However there is a general consensus among economists across the globe on the trend that with an increase in the GDP rate, the unemployment rate has been always low. (Heakal, R. 2008).This analysis is quite logical because an increase in Gross Domestic Product literally means an increase in the national product which in turn has to involve more manpower to keep up the increased level of production. The table below provides information on the unemployment rates which prevailed in Germany from the year 2003 to 2008. Year Unemployment rate Rank Percent Change 2003 9.80 % 104   2004 10.50 % 89 7.14 % 2005 10.60 % 98 0.95 % 2006 11.70 % 117 10.38 % 2007 7.10 % 80 -39.32 % 2008 9.10 % 108 28.17 % (Source: CIA, 2009 a) It is quite interesting to compare these figures with rate of change of yearly annual GDP. The table below tabulates the trends in GDP of Germany from 2000 to 2006. Year % change 2000 3.2 2001 1.2 2002 0.0 2003 -0.2 2004 1.1 2005 0.8 2006 2.9 (Source: Worldwidetax, 2009) While comparing the figures of trends in unemployment with that of trends in GDP of the respective year, it can be found that there exists a clear linkage between unemployment rate and the GDP value. Inflation The rate at which prices rise which is called inflation is another tool of macroeconomic analysis of a nation. (Moffatt, M 2008). This ratio is often calculated through Consumer Price Index and GDP deflator. (Barnes, R 2008).Consumer Price Index uses a comparatively simple methodology by assessing the continuously updated price of selected group of products. The GDP deflator is the balance between nominal GDP and real GDP. To understand it better, in cases where the nominal GDP which uses a standard rate of the national currency is more than the real GDP, it can be assumed that there is a rise in the cost of products. It would be interesting to analyse the inflation rate in Russia which has been confirmed by the Russian official sources as a serious economic problem. Year Inflation rate (consumer prices) Rank Percent Change 2003 15.00 % 20   2004 13.70 % 28 -8.67 % 2005 11.50 % 198 -16.06 % 2006 12.70 % 202 10.43 % 2007 9.80 % 187 -22.83 % 2008 11.90 % 200 21.43 % (Source: CIA, 2009 b) Demand The national production is highly affected by the demand for the products and services. The sources of demand can be the direct consumers, the government in terms of its spending capacity and also international trade and economic relations. However demand can cause a market performance impact only with reference to the quantum of disposable income of the people. Disposable income This is the actual disposable money which the customers can afford to spend and invest in the market after paying taxes. (Barnes, R 2008). This indicator very much depends on the salary or the income the citizens of the nation receive. However disposable income is directly related with other economic indicators and so is other indicators interlinked with each other. National Income & Personal Income The total of the income earned by the nation’s people in terms of return from labour and capital investment constitutes the national income. J.M.Keynes has defined national income as the money value of all goods and services produced in a country during a year. (DoE,2007). The calculation of National Income is a complex process involving production method, income method & expenditure method. The personal income or the per-capita income which is the average income of citizen of the nation also contributes as an economic indicator pointing towards the well being of nation and its people. A Sustainable economic model The economic well being of a nation involves complex linkages of common economic indicators. Apart from them, the economic scenario in a global perspective should be considered in order to serve as a background while evaluating a particular nation’s economic well being. Indicators like global economic growth, Interest rates, Stock market statistics, Producer Price Index and Employment Cost Index would help to evaluate where actually the nation stands in the international economic map. The export and import which directly depends on the global economic growth is one decisive factor of the economic standards of the nation. The interest rates directly refer to the availability of funds and the ease in the finance flow with out which a healthy economic scenario cannot exist. The national stock indexes also reflect a general market picture. The Producer Price Index which links with inflation has a major role in the well being of the nation where the Employment Cost Index is linked to the productivity which becomes integral in terms of economy. The direct and indirect linkages between the important economic indicators corroborate the fact that calculation of economic growth of the country cannot merely rely on the indications of Gross Domestic Product. Thus the GDP being on the rise solely cannot make a nation perform better in terms of economy than a nation with lower GDP. It is the combination of Gross Domestic Product with all the other economic indicators which realistically represents the economic well being of a nation. Fiscal and Monetary policies integrating and improvising the performance of these economic indicators would in long term help a country to ensure the economic welfare of the nation and its people. References Heakal, R. 2008, Macroeconomic Analysis,, Investopedia, viewed 27 February, 2009, < http://www.investopedia.com/articles/02/120402.asp?viewall=1> Department of Education 2007, National Income, Government of Kerala, Trivandrum, viewed 27 February, 2009, Generex, F & Vachnon, H, 2008, ‘Where Are We With The Us Recession’, Economic View Point ,vol.4, pp.457-464. Pattanayak, P 2008, ‘The Economic Crisis’, Malayalam, vol.12, no.21, pp.10-21 Moffatt, M 2008, What is inflation, About.com, viewed viewed 27 February, 2009, Barnes, R 2008, Economic Indicators: Overview, Investopedia, viewed 27 February, 2009, < http://www.investopedia.com/university/releases/> Vogiatzoglou K, 2008, ‘The Triad in Southeast Asia: What Determines U.S., EU and Japanese FDI within AFTA’, ASEAN Economic Bulletin, vol.25, no.2,pp.140-160 Central Intelligence Agency, 2009a, Economy: Germany, The World Fact Book, viewed 27 February, 2009, Worldwidetax, 2009, Germany GDP (real % change YOY), viewed 27 February 2009, http://www.worldwide-tax.com/germany/ger_gnp.asp Central Intelligence Agency, 2009 b, Economy: Russia, The World Fact Book, viewed 27 February 2009, https://www.cia.gov/library/publications/the-world- factbook/geos/rs.html#Econ This content can be found on the following page: http://www.investorwords.com/2153/GDP.html Read More