Unit 8 – Major issues in Macroeconomics

Unit 8 introduced many terms of Macroeconomics. It explained the basics of nominal and real GDP. GDP can be calculated via three means which are expenditure, income and production. Theoretically they should all give the same value, however with measuring errors there can be slight difference. The most common GDP expenditure equation is GDP, Y = Consumption + Investment +Government Spending + Net Exports.

Having a look at figure 1 it shows New Zealand’s GDP had a high amount of increase from 200…. To 200…. Now figure 2 shows a large increase in the value of housing stock, yes some of this was due to house prices increasing, however a lot of this was due to investment in new houses and also consumption on existing houses. The housing market in New Zealand is large and it can been seen that there is an effect on NZ’s GDP. There seems to be a bit of a large from changes in GDP and the value of housing stock, I would imagine this is because that there is a lag from the investment/consumption on houses to when they are valued.

Figure 1 – Real Gross Domestic Product, Annual Change %

Figure 2 – New Zealand’s House prices and value of housing stock

Investment on housing stock an oil are not the only things that have a major affect on NZ’s GDP, New Zealand’s two largest industries are large dairy and tourism industries. Both of these industries had huge growth in the early to mid 2000’s. Many farms were being turned from sheep and cattle farms into the productive dairy farms. That along with the increase in milk prices, peaking in 2006, helped increase NZ’s GDP, evident in figure 1. Tourist numbers visiting New Zealand has been growing steadily since 2000, and the amount an average tourist has also been increasing greater than inflation. Therefore both of these effects have been increasing New Zealand’s GDP.

Gross national product is all goods and services produced by permanent residents of a nation within a given period. Figure 3 and 4 shows the difference between GDP and GNI. GNI seems to grow at a steady rate while GDP is a lot more volatile. I would imagine this is because income of New Zealand residents does not fluctuate much whereas expenditure by foreign in New Zealand can fluctuated a lot. I would imagine when New Zealand is attractive to foreigners to invest or buy exports the quickly rush in, and whereas when New Zealand is less attractive to foreigners to invest they quickly rush their money out of New Zealand.

Figure 3 – Gross National Income in PPP dollars

Figure 4 – New Zealand’s Gross Domestic Product between 1960-2008

Referring to table 26.1 in Principle of Economics by Gans, King, Stone, Mankiw [4^th addition] it shows that New Zealand’s real GDP per capita in the 1950’s was the second highest within the table behind USA. By the end of the period 2004, New Zealand’s growth was significantly less than many of NZ’s OCED competitors. New Zealand had a growth rate over the 50 year period of 1.49% while Australia, USA and UK had growth rates of 2.03, 2.15 and 2.20 respectively. There were a two main reasons for this, there were; the United Kingdom joining the EU in the 1970’s, who were NZ’s largest trading exporter for mainly products of wool, lamb and beef at before the 1970’s. After UK joined the EU, there were trade restrictions on importing NZ products due to the EU agreement, meaning New Zealand’s largest exporter was no longer buying New Zealand’s quantity, really cutting NZ’s GDP. Also the Muldoon era created large inflation which really restricted NZ’s GDP. Looking at Figure … you can see that New Zealand’s GDP per capita was on par with many of the other OCD countries, however after the early 80’s New Zealand and never caught up with the OCD countries.

On the Brightside for New Zealand, it has invested significant amounts into its economy, approximately 21% between 1950 and 2004. This is not as much as Australia and Germany, however significantly more than USA and UK. This means that in the future New Zealand’s productivity will likely grow faster than USA and UK as they have invested significantly into this data. However, this is an objective argument and it depends on what New Zealand has invested in compared to other countries.