Real GDP Growth Rate and Real GDP Per Capita

Question: Define and Explain Real GDP, Real GDP Growth Rate and real GDP per Capita. Answer: Introduction UK economy is selected to analyze the economic performance over the last decade (from 2005 to 2014). England, Great Britain and Northern Ireland constitute UK. It is a member of European Union (EU). In Europe, it is the third largest economy. In this country, more than 80% population speaks English language (EUbusiness, 2014). The central bank of this country is Bank of England that takes actions on the behalf of government to improve economic conditions. Production Output Performance Analysis Define and Explain Real GDP, Real GDP Growth Rate and real GDP per Capita The major factor to analyze macro-economy of a country includes Gross Domestic Production (GDP). GDP represents total production of an economy over a specified time period in monetary values (Tucker, 2010). Real GDP, real GDP growth rate and real GDP per capita analysis measure production output of a country, which is explained below: Real GDP: It is an economic measure that reflects inflation adjusted financial value of goods and services produced within a nation during a specific time period. This provides a way to measure the economic performance a nation. It is defined by Office for National Statistics (ONS) as the sum total of the final output an economy produces (Khan, 2014). This indicator captures and presents value of an economy in monetary value. Thus, real GDP includes valuation of overall production economy with the consideration of inflation (Mankiw, 2014). This helps to measure economic value of a nation. Increase in GDP indicates that an economys performance has improved, whereas decline in GDP means poor performance. Real GDP Growth Rate: The growth rate of real GDP indicates the rate of change to which GDP has changed over a period of time. The economic value of a nations output is likely to change overtime. The growth rate helps to determine the change in the nations output. Increase in rate of GDP reflects economic improvements in the county and vice versa (McTaggart et al., 2012). Real GDP per capita: It is also an important indicator to measure the wealth of a nation. Real GDP per capita means average GDP per person in an economy. It helps to determine actual increase or decrease in the level of GDP per person (Tucker, 2010). This reflects the wealth of individuals in an economy. Thus, it provides a way to measure economic performance. Performance Trends of UK Economy Below graph shows real GDP performance within UK Economy: (OECD, 2016) From the above graph, it is determined that the production output of this county is improving consistently after 2010. Financial crisis of 2008 has adverse impact on the performance of production output of UK that caused decline in the real GDP. Currently, the production level of this country has improved significantly in last 5 years. This indicates that the production output of services and goods are increasing that contributes in rise of GDP volume of the country. Following graph shows real GDP growth within UK Economy: (World Bank, 2015) On the basis of above graph, it is analyzed that the economic financial crisis caused significant decline in the GDP growth rate. Due to this, highly negative (-4.31%) GDP has incurred. But at the same time, significant improvement in economic performance after 2009 is also analyzed from the above graph. Below graph shows performance trend for the Real GDP per Capita (World Bank, 2015) It is analyzed on the basis of above graph that GDP per capital in this country shows signs of improvement after 2010. Before, it has declined significantly due to global financial crisis. But, the performance trends of last five years shows increase in real GDP per capita. Government Measures to Achieve Production Output Performance For boosting the production level of this country, UK government has taken several measures which mainly include fiscal and monetary policies. Through declining rate of interest, government has adopted expansionary monetary policy to increase money supply in the market. It made the borrowings more attractive that encougred people to spend and demand more. Business obtained cheap finance to make investment (GOV.UK, 2016). This policy has played critical role in boosting the demand and supply within the economy that caused rise in production level. After economic crisis, expansionary fiscal policy has adopted by the government. By increasing government spending and lowering tax rates, government facilitated increase in the production level (GOV.UK, 2016). Due to low tax rates, disposable income of people and businesses has increased that facilitated significant increase in the demand and supply in economy. This encougred businesses to produce more that helped government to achieve output performance (Veldkamp, 2011). Labour market analysis Unemployment trends based on unemployment rates: The below diagram shows the unemployment rates from 2004 to 2014: From the above diagram, it can be determine that there is a fluctuating trend in unemployment in the UK economy. From 2004 to 2011, there was an increasing unemployment trend in the UK economy, but after this, there is a significant decline in unemployment rate due to generation of more jobs in the country. In 2004, the unemployment rate was 4.8%, while in 2014; it was 6.2% showing a significant growth in unemployment and an increasing trend in unemployment since 2004. Definition of unemployment and types of unemployment in an economy: According to the Bureau of Labor Statistics (BLS), unemployment can be defined as a situation where people do not have a job, have searched job in the past four weeks and are currently available for job (Mankiw, 2012). It is related to the people, who have no job and are unable to get a job in an economy. There are three types f unemployment namely frictional, structural and cyclical unemployment. Frictional unemployment occurs due to the normal turnover in labor market. It is because people move or change occupations as they are temporarily between jobs. On the other hand, structural unemployment arises when people have lost their work due to change in the economy such as automation or changes in demand of required skills. At the same time, cyclical unemployment is related to unemployment because of decline in total production of the economy. It occurs when an economy is facing changes in business cycle like recession. Types of unemployment in the UK economy: It is noted down from the unemployment trend that there is a significant increase in unemployment rate after financial crisis in 2008-09. It shows that there was a big recession in UK economy that affected its unemployment trend at a large extent. On the basis of this, it can be stated that, there is cyclical unemployment in the UK economy due to fluctuations in economic conditions of the country. There is a economic slowdown in UK that affected employment and increased unemployment at a significant level. It is because there is no enough demand to employ all labor. At the same time, the UK economy also faces structural unemployment because of changes in structure of the countrys economy that have affected some industries and occupations (McEachern, 2013). In addition, there is mismatch between job and skills that creates difficulty in recruitment. Due to outsourcing and business expansion in other countries, the firms of UK have reduced employment in the country that has affected a million of jobs in the UK economy. Governments measures adopted to achieve full employment: From the unemployment trends, it can be determined that after 2011, unemployment rate is decreasing at continuous level. The reason behind this decline in unemployment is the government measures that are taken to achieve full employment. The UK government focused on different policies including macroeconomic policies, welfare reform and employment and skills policy. The main focus of the government was on the removal of bureaucracy, deregulation and prioritizing action to restore UK competitiveness (Lambert, 2016). At the same time, the government of UK also adopted some reforms by removing demand-side problems in the labour market such as the trade-offs between an increasingly flexible labour market and insecure and low-paid jobs and growing wage inequalities. Price level analysis Inflation trend based on inflation rate: There are high fluctuations in inflation rate of UK during the period between 2004 and 2014. The below diagram shows the inflation rates of the UK economy from 2004 to 2014: The above diagram shows that there was an increasing trend in inflation rate from 2004 to 2008. After this, in 2009, there was a great decline in inflation rate in year 2009 due to the impact of economic slowdown in the country. After this, there was an increasing trend after 2009 till 2011 due to economic reforms by the government. After 2011, there is a decreasing inflation trend in the UK economy leading to zero-economy. Therefore, the inflation rate is increased from 1.3% in 2004 to 1.5 % in 2014 (Lynch, 2015). Definition of inflation and typical causes of inflation: Inflation can be defined as a percentage change in the value of the Wholesale Price Index (WPI) on a year-on year basis (Mankiw, 2012). It shows an increase in the aggregate price level or the cost of living in an economy. The typical causes of inflation are imbalance between demand and supply of money, changes in production and distribution cost and increase in taxes on products. All these changes are dependent on the macroeconomic policies of the government including fiscal and monetary policies that are accountable for making changes in tax rate and interest rate and supply of the money available (McEachern, 2013). For instance, when the government reduces taxes, it increases the disposable income of the consumers causing higher demand and increase in inflation. In addition, the government spending causes extra demand in the economy that also causes inflation. A fall in interest rates also stimulates the demand of products and causes imbalance in supply and demand and creates infl ation. Cause(s) of inflation in the UK economy: In the UK economy, country also faced high inflation after financial crisis in 2008 due to government reforms in terms of reduction in tax rates and interest rates. Lower interest rate and cut in tax rates contributed in the availability of disposable income of consumers and made the money available for them to purchase the goods and services leading to an increase in prices of products and services and rise in inflation rate (McEachern, 2011). But after 2011, there is a significant drop in inflation due to changes in oil prices at international level that has reduced the level of inflation in the country causing deflation and zero-economy. Governments measures to achieve stable price: Government has taken several measures to achieve stable price by reforming the macro-economic policies. For this, government has made some changes in fiscal and monetary policies by affecting tax rate and interest rate to stable price. The UK government is likely to retain the inflation rate of 2% to achieve stable price. For this, the Bank of England set interest rates as it has sustained interest rate of 0.5% since 2009 after the financial crisis in 2008. The low-interest rate has helped the country to achieve stable price (Mcrae, 2015). It is because low interest rate encourages the producers to make more investments and keep the prices of goods lower that is effective to produce cost effective products. In addition, rise in tax rate after 2009 also has contributed in stabilization of price by reducing purchasing power of people. Conclusion On the basis of the above discussion, it can be concluded that it is essential for an economy to take better measures and policies to improve the economic conditions of the country. The UK economy can be said in good condition due to increasing GDP and decreasing inflation rate. But at the same, there is an increasing trend in unemployment rate that shows the ineffectiveness of the government to take better measures to provide more jobs. In addition, it is also concluded that government of UK has taken several measures to improve economic conditions, but still, there is a need for the government to take effective measures through changes in fiscal and monetary policies to make betterment in economy of the country. References EUbusiness (2014) United Kingdom: country overview. GOV.UK (2016) 2010 to 2015 government policy: sustainable development. GOV.UK (2016) 2010 to 2015 government policy: UK economic growth. Lambert, S. (2016) When will interest rates rise? Bank's lone wolf ends his hike calls, as outlook for a rise drifts to 2017. Mankiw, N. (2014) Principles of macroeconomics. USA: Cengage Learning. Mankiw, N.G. (2012) Principles of Microeconomics. USA: Cengage Learning. McEachern, W.A. (2011) Economics: A Contemporary Introduction. USA: Cengage Learning. McEachern, W.A. (2013) Microeconomics: A Contemporary Introduction. USA: Cengage Learning. McTaggart, D., Findlay, C. and Parkin, M. (2012) Microeconomics. Australia: Pearson Higher Education AU.