BUS102 Introduction to Economics – Semester 1 2019

This document is a response to an article titled 'Australia’s economic growth slows rapidly to 2.8pc' and includes answers to questions related to the article. It discusses the latest figure for year-on-year GDP growth in Australia, the sectors that performed well and those that did not, the reasons why the Australian economic situation is not desirable for the Reserve Bank to raise interest rates, and the definition and difference between GDP and GDP per capita.

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BUS102 Introduction to Economics – Semester 1 2019
Assessment task 2 – Responses to articles - Article 1
DUE via Safe Assign 5pm Sunday 24th March
NAME:
ID NO:
Tutor’s name:
“Australia’s economic growth slows rapidly to 2.8pc”By Stephen Letts (from ABC news of
5th December 2018) is available at:
https://www.abc.net.au/news/2018-12-05/australian-economy-cools-in-q3/10584234
Access the article in the URL above and answer the questions in the spaces below. Use full
sentences and show all necessary working but do not use more space than is given. Other
references are not necessary (unless specified in the question) but, if you do use any (for
example, online economics glossaries) please list at least the URL of your source. Please read the
marking rubric provided in the separate file before answering the questions. Total mark for this
assignment is 15.
(1)State the latest figure available for the year-on-year GDP growth in Australia mentioned in
the article. Considering that Australia GDP per capita amount to $53,800, comparethe effect of
the growth ratestatedwith the growth rate expected by the analysts, according to the article, if
they were sustained over a period of 20 years. (show your working)
Solution: The current GDP per capita for Australia is considered to be $ 53,800. Based on the
given article, it is apparent that the actual growth rate registered by Australia amounts to 2.8%
per annum. This is lower than the corresponding estimates of 3.3% per annum by the analysts.
In order to understand the long term impact of the above two growth rates, the computation of
the GDP per capita after 20 years has been carried out with the given growth rates.
The appropriate mathematical expression for computation of the future GDP per capital is
shown below.
Future GDP per capita = Present GDP per capita *(1+r)n
Where r is the annual growth rate and n is the time period
GDP per capita after 20 years based on actual growth rate = 53,800*(1+(2.8/100))20 = $93.464
GDP per capita after 20 years based on analyst growth rate= 53,800*(1+(3.3/100))20 = $102,989

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It is evident that GDP per capita after 20 years would be 10% higher if the growth rate predicted
by analyst is met.
(2)According to the article and considering the national income accounting identity,carefully
describe which sectors performed well and which ones did not.
Solution: The GDP computation essentially comprises of contribution from four key aspects
namely government spending, consumer spending, private investment and net exports. As per
the given article, two components which have performed well are government spending and net
exports. However, the problem areas have been pointed as consumer spending and private
investment as there has been a significant decline in household spending and capital
expenditure. If these two components (i.e. consumer spending and private investment) had
performed better, then the corresponding GDP growth in the quarter would have been higher.
Amongst the sectors that have not performed well include construction which has witnessed a
de-growth. The performance of manufacturing and retail sector has also been lacklustre as the
growth in these sectors has been significantly lower than expected. However, exports related
industries such as agri-commodities along with mining seem to have performed well resulting
in improvement in net exports during the quarter.
(3)Explain why the Australian Economic situation described in the article, “is not the result the
Reserve Bank would be looking for in its quest to raise interest rates”.
Solution: The raising of interest rate is considered to be suitable in an environment when the
economic growth is robust and the aggregate demand is increasing owing to which there is a
risk of overheating of the economy in the future. The Reserve Bank thereby tends to increase
the bank rate which leads to higher interest rate. This tends to reduce the aggregate demand
owing to higher cost of funding and thereby prevents overheating of economy (Krugman and
Wells, 2015).
However, as per the current article, the economic growth is slower than the estimates of the
analyst and the government. Also, there are various key sectors linked to domestic economy
such as construction, real estate which are slowing down. Further, there are concerns on the
falling standard of living for the Australian people. In such a scenario, there is a need to increase
the growth rate of GDP. This required improvement in aggregate demand for which interest rate
should be cut and not raised. As a result, the author indicates that the current data is not the
desirable result that Reserve Bank wants if it has to raise interest rates as the data hints
towards lowering interest rates (Mankiw, 2016).
(4) Referring to the diagram “GDP and GDP per capita” define the two terms and explain why
they differ.
The GDP refers to the sum of value of products and services that are produced by a given nation
(In this case Australia) during a given period usually a year. The growth rate in GDP is often

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used as a key benchmark for economic development. GDP may be nominal or real depending on
whether it is computed at current prices or the prices of the base year. GDP per capita is also a
measure of economic development which is computed by dividing thee GDP by the total
population of the concerned nation. This provides a better comparison since GDP of different
countries varies in accordance with their population. However, comparison of GDP per capita
provides a comparison of per person production in the given nations. GDP per capita may also
be real or nominal based on whether real GDP or nominal GDP is used for computation (Barro,
2017).
It is evident from the definition of the two concepts that these two tend to differ. Another
difference is apparent from the diagram which captures both the development measures. This is
because the extent of growth and drop of GDP per capita to GDP is always lesser in the
Australian context. This may be attributed to the fact that the population is growing and hence
percentage change in GDP per capita would be lesser in comparison to percentage change in
GDP (Koutsoyiannis, 2015).
References

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Barro, J.R. (2017) Macroeconomics.2nd edn. New York: MIT Press, pp. 67-68
Koutsoyiannis, A. (2015) Modern Macroeconomics. 4th edn. London: Palgrave McMillan, pp.
65-66
Krugman, P. and Wells, R. (2015) Macroeconomics.3rd edn. London: Worth Publishers, pp.
78-79
Mankiw, G. (2016) Principles of Macroeconomics.6th edn. London: Cengage Learning, pp.
108-110