Growth Accounting Equations of Different Countries | Business Economics

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BUSINESS ECONOMICS

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Contents
Introduction................................................................................................................................3
Growth accounting and drivers of growth for USA...................................................................3
Growth accounting and drivers of growth for UK.....................................................................6
Conclusion..................................................................................................................................8
Reference....................................................................................................................................9

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Introduction
Real GDP growth rate is the growth rate of an economy after the adjustment is done for the
inflation. That means in case of read GDP growth rate, there is a relative change in the
production of a country compared to the other price level and the resources used in the
process of production. As per the prediction the real growth rate of the US and the global
economy as a whole will increase in the coming years. The objective of the paper is to
discuss the drivers of growth rate so that growth accounting can be discussed for the USA
and UK, one of the biggest economic rivals of the USA.
Growth accounting and drivers of growth for USA
In general the growth rate of the economy of the USA depends on the changes in the
aggregate demand in the economy (Asongu and Odhiambo, 2018). The aggregate demand in
turn has some of the components that change the value of the aggregate demand in the
economy in any point of time. These drivers are the consumption expenditures, investment
expenditures, government expenditures and the net export.
Figure 1: The real GDP growth rate of the USA over the years
(Source: Conference-board.org, 2020)

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Between the year 2000 and 2018, the real GDP growth rate of the USA has changed
significantly in some of the phases (Khalifa et al. 2019). This is due to the occurrence of the
financial crisis of 2007 which had significantly affected the growth rate flow of the country.
There is a sharp drop in the real GDP growth rate of the country in the year 2007. Now, this
drop has been preceded by a drop in the consumers’ expenditure as well. During the time of
recession the demand for the goods and the services reduced and hence the aggregate demand
for the goods and services reduced too (Kaboro et al. 2018). This led to a reduction in the
production of goods and the services in the following year in case of the USA.
Figure 2: The consumption expenditure of the USA over the years
(Source: Conference-board.org, 2020)
The figure above shows that there is a slight change in the trend in the consumption
expenditure during the time of recession and that led to the fall in the real GDP growth rate.

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Figure 3: The government expenditure of the USA over the years
(Source: Conference-board.org, 2020)
On the other hand the government expenditure is another component of aggregate demand
that could have worked for the real GDP growth rate change in case of the USA. Now it can
be seen that during the recession the expenditure of the government increased and it later
decreased with time as the economy started to get back at its normalcy (Li and Lin, 2019).
Therefore the role of the government expenditure in real GDP growth rate is not much
significant in case of the USA. It is only used to boost the aggregate demand when there is a
requirement. Investment follows exactly same pattern as the consumption in case of the USA
and hence it is the consumption and the investment expenditure that matters for the USA.
Now, both the consumption and the investment expenditure of the economy depend on the
level of technological advancement and the increase in the physical capital (Wang et al.
2020). Increase in the physical capital increases the productivity of the labours and hence real
GDP increases. On the other hand the advancement in the technology produces more
products at any given level of capital. These further increases the level of production and
hence real GDP increases (Sarkodie, 2018). Therefore, the increase in the physical capital and
the advancement of technology mainly fostered the growth rate of consumer spending and
investment spending that further led to the rise in the real GDP growth rate for the USA.

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Growth accounting and drivers of growth for UK
The drivers of growth in case of the UK are somewhat different from that of the USA.
Although the basic component of the aggregate demand for the UK is same, it has a
significant influence of the government expenditure in the aggregate demand. The
government has used the expenditure to boost the real GDP growth rates many times in the
past.
Figure 4: The Real GDP growth rate of the UK
(Source: Conference-board.org, 2020)
The real GDP growth rate had a downward slopping trend other than the steep decrease in the
growth rate due to the impact of the global financial crisis. The decrease in the growth rate
can also be observed in the period after the financial crisis as well (Abaas et al. 2018). The
corresponding decrease in the expenditure from the side of the government can also be seen
for the same period.

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Figure 5: The expenditure of the government over the time
(Source: Conference-board.org, 2020)
The period after the financial crisis shows that the government expenditure is a major driver
of growth rate of the Real GDP in case of the UK. The government expenditure is often used
for the development of the human as well as physical capital that further creates the aggregate
demand necessary for the increase in the real GDP growth rate. Other than that the consumer
spending is another driver that increases the aggregate demand for the goods and the services
in the economy thereby increasing the volume of human as well as physical capital leading to
a rise in the real GDP growth rate (Kaboro et al. 2018). The figure below shows that after the
recession the consumer spending has reduced over the years which have also reflected in the
real GDP growth rate of the economy as well.

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Figure 6: The consumers spending of the UK over the years
(Source: Conference-board.org, 2020)
Conclusion
Therefore, the growth accounting equations for all the countries of the world are same.
However, the influence of components is different in case different countries of the world.
While the intervention of the government and its spending in the US economy is limited,
government expenditure explains the changes in the real GDP growth rate in case of the UK.
However, consumer demand is one of the common drivers in both the countries as it shows
that consumer expenditure directly increases the aggregate demand for the goods and the
services in the economy directly influencing the real GDP growth rate.

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Reference
Abaas, M.S.M., Chygryn, O., Kubatko, O. and Pimonenko, T., 2018. Social and economic
drivers of national economic development: the case of OPEC countries. Problems and
Perspectives in Management, 16(4), pp.155-168.
Asongu, S. and Odhiambo, N.M., 2018. Drivers of growth in fast emerging economies: a
dynamic instrumental quantile approach to real output and its rates of growth in Brics and
Mint countries, 2001-2011. Applied Econometrics and International Development, 18(1),
pp.5-22.
Conference-board.org. (2020). The Conference Board | Trusted Insights for What's Ahead.
[online] Available at: https://www.conference-board.org/us/ [Accessed 4 Mar. 2020].
Kaboro, J., Kalio, A. and Kibet, L., 2018. The effect of real gross domestic product (GDP)
growth rate convergence on exchange rate volatility in search for the East African monetary
union. Journal of Economics and International Finance, 10(6), pp.65-76.
Khalifa, A., Caporin, M. and Di Fonzo, T., 2019. Scenario-based forecast for the electricity
demand in Qatar and the role of energy efficiency improvements. Energy policy, 127, pp.155-
164.
Li, J. and Lin, B., 2019. The sustainability of remarkable growth in emerging
economies. Resources, Conservation and Recycling, 145, pp.349-358.
Sarkodie, S.A., 2018. The invisible hand and EKC hypothesis: what are the drivers of
environmental degradation and pollution in Africa?. Environmental Science and Pollution
Research, 25(22), pp.21993-22022.
Wang, Q., Jiang, X.T., Yang, X. and Ge, S., 2020. Comparative analysis of drivers of energy
consumption in China, the USA and India–a perspective from stratified
heterogeneity. Science of The Total Environment, 698, p.134117.