The Trend Rate Of Growth Of Gdp

Published Date: 02 Nov 2017

The Micro economy concerns that how the individuals and the firms utilize the scarce resources in order to produce products & services. Macro economy concerns the economy as a whole with regard to the economic growth, inflation, unemployment, BOP, exchange rates. These main factors lead the economy to have a better standard of living in a country.

An economy is always expected to utilize its resources efficiently to have the maximum production with a low cost. In this regard, the resources must be allocated the best way possible. The PPF (Production Possibility Frontier) shows how this can be achieved graphically. The PPF indicates the production of two goods that an economy can produce utilizing the limited resources. Points along the PPF are considered as the output which is produced utilizing maximum resources. And also the points within the PPF show the obtainable but inefficient output and the production which impossible to obtain is indicated by the points outside the PPF.

 

In this PPF, the points ‘A’ & ‘B’ indicate the efficient production with maximum resources utilization. Point ‘C’ shows the output obtainable but inefficient while the point ‘D’ indicates the output impossible to obtain with the existing resources.

What is the "economic growth"?

Economic growth is an increase of the total GDP (Gross Domestic Product) over a certain period of time. This can be identified with the higher living standard of the people of the country. With the economic growth, the country can experience better standard of living as the government & the private sector receives a higher income. The investment on production of goods or services by the government & non government investors will lead to have a strong currency value and equilibrium of balance of payment. The factors such as investment, activities by trade unions, policies of the government will influence in the economic growth.

Economic growth on the PPF

The economic growth can be displayed by shifting the PPF 1 curve to PPF 2 to the right as follows,

GDP (Gross Domestic Product)

The GDP refers to the market value of the total output of an economy. This is used as a measurement of the standard of living. GDP can be identified in three significant approaches as product approach, income approach & expenditure approach. These 3 approaches give the same result when concerning the economy as a whole.

The GDP influences on the behavior of trade cycle in an economy.

"The trend rate of growth of GDP approximates the growth in productive potential of the economy"

When referring to the economic growth, each country faces this situation of increasing the trend rate of GDP. The productive potential implies that the production that can be produced utilizing the current resources of the country. It can be varied to country to country. However, the current GDP of a country does not show the productive potential of its economy. GDP varies from the potential production depending on the utilization of resources.

E.g. - in a given period the firms can increase or decrease production by changing their use of resources available.

The level of potential production in a country is depending on the resources available, how they are allocated and its maximum utilization. From time to time, the growth and the efficiency of the financial sector will help to reduce or increase the potential output. The facts such as economic recession among countries, war situation, natural disasters, increasing demand, financial policies, employment and unemployment, change in technology will have an impact on GDP.

In the recent past, there had been an economic recession in European countries and USA. These countries experienced a bad effect on GDP. The dependent countries of these countries too also suffered a lesser GDP rate.

Analyzing the figures in relation to the growth rate of GDP with the trade cycle

Trade cycle

When concerning the macro economy, the trade cycle plays a major role in an economy. The trade cycle refers to the upward and downward swing of the aggregate level of output of the economy during a specific time period. These trade cycles are also known as business cycles. The main positions of the trade cycle are Boom, Inflation, Depression, and Recovery.

Boom- this refers to the rapid growth of the economy. High level of demand, production and employment can be seen during this period. This situation can be identified as a prosperity position of the economy. And also the increase in investments and production can be noticed. The prices tend to be increased due to the excess demand. The consumers spend more money on products & services. So in the boom situation the country can have a high standard of living.

Inflation- the less consumption, increasing unemployment, businesses are making losses due to the reduction in the production and investments are expected during this period. The remaining stocks of unsold goods are also can be seen.

Depression- the overall economic activities are declined in the course of depression. The production, prices, demands, employment are going down which leads to the national income decreases finally. This will result in a reduction of government income.

Recovery- the upswing of the trade cycle indicates the recovery stage. This can be identified with the expansion of the production and the profits, new investments, rising consumer buying power, decreasing of the unemployment, increasing of the government income.

When concerning the rate of growth of GDP, it is observed that the trade cycle of Sri Lanka had experienced a fluctuated rate of GDP. According to the Annual Report published by Central Bank of Sri Lanka, the GDP experienced over the period of past 15 years is as follows.

Time(years)

GDP

1990 -1996

5.3

1997

6.3

1998

4.7

1999

4.3

2000

6.0

2001

-1.5

2002

4.0

2003

5.9

2004

5.4

2005

6.0

2006

7.4

2007

6.8

2008

6.0

The above GDP rates can be illustrated graphically using the trade cycle. During the last 15 years, it is observed that Sri Lankan economy has faced the four stages of trade cycle i.e. boom, inflation, depression and recovery. The graph related to this is shown below.

When illustrating the rate of GDP during the last 15 years with using the trade cycle, the above stages can be identified. This trade cycle consists of boom, inflation, recession and recovery.

With reference to the above graph, it can be clearly understood that there were some years where the economy faced the boom situation.

Analyzing the figures in relation to the growth rate of GDP

According to the figures of the Annual Report of Central Bank of Sri Lanka, the growth rate of GDP had been changed from one year to another for last 15 years.

During the period of 1990 to 1996, the GDP real growth rate was 5.3% and the GDP deflator was12.1%. As the GDP deflator indicates, the overall price level had declined from 8.4% to 4.4% in 1999 with a faster rate than expected. And also there was a decreasing of the unemployment in the private sector. This could create an impact on the GDP growth rate.

In the year 1997, the real growth rate increased with a considerable amout of 2.5% and the GDP deflator decreased to 8.6%.