Reference no: EM13837144

Economic Principles: Case Study Background Information

Australia

The Australian economy has experienced continuous growth and features low unemployment, contained inflation, very low public debt, and a strong and stable financial system. By 2012, Australia had experienced more than 20 years of continued economic growth, averaging 3.5% a year. Demand for resources and energy from Asia and especially China has grown rapidly, creating a channel for resources investments and growth in commodity exports. The high Australian dollar has hurt the manufacturing sector, while the services sector is the largest part of the Australian economy, accounting for about 70% of GDP and 75% of jobs. Australia was comparatively unaffected by the global financial crisis as the banking system has remained strong and inflation is under control. Australia has benefited from a dramatic surge in its terms of trade in recent years, stemming from rising global commodity prices. Australia is a significant exporter of natural resources, energy, and food. Australia's abundant and diverse natural resources attract high levels of foreign investment and include extensive reserves of coal, iron, copper, gold, natural gas, uranium, and renewable energy sources. A series of major investments, such as the US$40 billion Gorgon Liquid Natural Gas project, will significantly expand the resources sector. Australia is an open market with minimal restrictions on imports of goods and services. The process of opening up has increased productivity, stimulated growth, and made the economy more flexible and dynamic. Australia plays an active role in the World Trade Organization, APEC, the G20, and other trade forums. Australia has bilateral free trade agreements (FTAs) with Chile, Malaysia, New Zealand, Singapore, Thailand, and the US, has a regional FTA with ASEAN and New Zealand, is negotiating agreements with China, India, Indonesia, Japan, and the Republic of Korea, as well as with its Pacific neighbors and the Gulf Cooperation Council countries, and is also working on the Trans-Pacific Partnership Agreement with Brunei Darussalam, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the US, and Vietnam.

Pakistan

Decades of internal political disputes and low levels of foreign investment have led to slow growth and underdevelopment in Pakistan. Agriculture accounts for more than one-fifth of output and two-fifths of employment. Textiles account for most of Pakistan's export earnings, and Pakistan's failure to expand a viable export base for other manufactures has left the country vulnerable to shifts in world demand. Official unemployment is under 6%, but this fails to capture the true picture, because much of the economy is informal and underemployment remains high. Over the past few years, low growth and high inflation, led by a spurt in food prices, have increased the amount of poverty - the UN Human Development Report estimated poverty in 2011 at almost 50% of the population. Inflation has worsened the situation, climbing from 7.7% in 2007 to almost 12% for 2011, before declining to 10% in 2012. As a result of political and economic instability, the Pakistani rupee has depreciated more than 40% since 2007. The government agreed to an International Monetary Fund Standby Arrangement in November 2008 in response to a balance of payments crisis. Although the economy has stabilized since the crisis, it has failed to recover. Foreign investment has not returned, due to investor concerns related to governance, energy, security, and a slow-down in the global economy. Remittances from overseas workers, averaging about $1 billion a month since March 2011, remain a bright spot for Pakistan. However, after a small current account surplus in fiscal year 2011 (July 2010/June 2011), Pakistan's current account turned to deficit in fiscal year 2012, spurred by higher prices for imported oil and lower prices for exported cotton. Pakistan remains stuck in a low-income, low-growth trap, with growth averaging about 3% per year from 2008 to 2012. Pakistan must address long standing issues related to government revenues and energy production in order to spur the amount of economic growth that will be necessary to employ its growing and rapidly urbanizing population, more than half of which is under 22. Other long term challenges include expanding investment in education and healthcare, adapting to the effects of climate change and natural disasters, and reducing dependence on foreign donors.

Australia Pakistan

Exports

$257.90 billion

Ranked 22nd. 10 times more than Pakistan

$24.71 billion

Ranked 69th.

GDP
$1.52 trillion

Ranked 13th. 7 times more than Pakistan $231.18 billion

Ranked 42nd.

GDP Composition by sector Industry

26.6%

Ranked 108th. 4% more than Pakistan 25.5%
Ranked 115th.

GDP Per capita

$37,828.78 per capita

Ranked 15th. 15 times more than Pakistan $2,500.27 per capita

Ranked 133th.

GDP Per capita PPP

$42,000.00

Ranked 11th. 14 times more than Pakistan $3,100.00
Ranked 138th.

GDP Purchasing power parity

$961.00 billion

Ranked 18th. 76% more than Pakistan $546.70 billion

Ranked 26th.

GDP per capita

$67,035.57

Ranked 5th. 52 times more than Pakistan $1,290.36

Ranked 139th.

Gross National Income

$386.00 billion

Ranked 14th. 6 times more than Pakistan $60.05 billion

Ranked 39th.

Public debt

32.4% of GDP

Ranked 107th. 52.1% of GDP

Ranked 57th. 61% more than Australia

Tourist arrivals

5.59 million

Ranked 35th. 7 times more than Pakistan 823,000

Ranked 92nd.

Unemployment rate

5.2%

Ranked 88th. 6%

Ranked 74th. 15% more than Australia

You should be able to:

1. Define gross domestic product (GDP) and Gross National Income (GNI) and their main features.

2. Identify the shortcomings of GDP as a measure of economic activity and economic welfare.

3. Explain the role of GDP in comparing various economies in terms of size and growth.

4. Make valid observations about the state of the Australian economy vs the Pakistani economy from the data provided.

5. Define inflation and explain its causes and consequences.