Macroeconomic Concepts Gross Domestic Product

Question: Discuss about the Macroeconomic Concepts for Gross Domestic Product. Answer: Introduction Japans economy is the third largest in the world by its nominal Gross Domestic Product. By Japans Purchasing Power Parity, the country stands fourth in the world. In the view of Sharma (2014), the country has shown its Gross Domestic Product of $4.41 trillion USD. Like most of the developed countries, Japan heavily depends on its service sector which gives more than seventy percent of the countrys national income, and on its industrial sector which contributes around 27 percent to the countrys Gross Domestic Product. The agricultural sector only contributes little more than one percent to the Gross Domestic Product. The country is presently facing a 3.4 percent of unemployment. As stated by Holzhausen (2013), Japan has aimed to increase its domestic demand and income through various measures, among which the Abenomics is famous. The prime minister of Japan Shinzo Abe advocated a three way stimulus for the domestic economy which will help it to grow at a fast rate. The overall stimulus comes as fiscal stimulus, monetary stimulus, and structural reforms. The government spending was increased since the Abenomics took place. The purpose of these stimuli is to help the economy of Japan grow at a consistent pace. In reality, the country is facing a roller coaster cycle of contraction and expansion. In the eyes of Flath (2014), the records are not showing any promise of improvement in the near future. The purpose of this report is to show the reason behind the economic cycle moving so fast and show ways how the economy can achieve a consistent pace rather than a quick magnitude changing its course frequently. The report uses various macroeconomic concepts in order to explain the roller coaster behaviour of Japans economy. The macroeconomic variables used in this report are Gross Domestic Product (GDP), national income accounting, business cycle, inflation, recession, and unemployment. Government policies like fiscal policy, monetary policy, and structural reforms are also discussed here to critically analyze the economy of Japan. The Gross Domestic Product is the total value of all the final goods that have been produced within the borders of a country in a year. It is used as an indicator of improvement of a country and its wealth creation potential within a time period. The Gross Domestic Product will be used in this report to show the business cycle that is being witnessed by Japan. The Gross Domestic Product is calculated by the National Income Accounting methods. It will show how the Abenomics works on Japans economy. The business cycle shows an economys ups and downs through the time. It shows the how an economy comes out of recession and moves forward to the boom and then again moves backwards. The inflation and the recession are two states of an economy. The inflation points out a sustained increase in the level of price of goods and services in an economy over a time period. On the other hand, recession focuses on the negative growth of an economy over a period of time. A recession slows down the improvements in a country. The unemployment is the state in which a person who is looking for a job but is not being absorbed in the production process of an economy. It works as an indicator of the betterment of an economy. A nation with lesser unemployment rate has a higher improvement rate. These macroeconomic variables together and individually are capable of assessing the economy of Japan. These will show the direction in which the country is moving. The Gross Domestic Product application in the case of Japan has shown a series of ups and downs since the year 1990. Even after the introduction of Abenomics, this characteristic about the countrys economy did not change. The situation can be depicted in the figure below: The figure above shows the growth and falls of the economy of Japan. The trend line shows that even after the falls occur in the country, the overall improvement of the countrys Gross Domestic Product is positive. The countrys Gross Domestic Product represents the 6.56 percent of the worlds total Gross Domestic Product. In one of their latest finding Botman, Danninger and Schiff (2015), stated that the country has the third largest economy in the world, according to its nominal Gross Domestic Product value. The countrys exports and imports play a huge role in determining its total wealth earned per annum. As stated by Fukuda (2015), the products manufactured by the service industry are the main source of this huge Gross Domestic Product. With time, Japans dependency on the service sector and especially the manufacturing sector increased. In the eyes of Aoki (2013), the manufacturing sector of Japan incorporates production of motor vehicles, machine tools, electronic equipments, steel and nonferrous metals, chemicals, ships, textiles, processed foods, and many more. According to the ease of doing business rank, the country is positioned 24th. This phenomenon shows how easy it is to do a business in the country provided its government regulations, supply of raw materials, infrastructure, and other things. The national income accounting formula is: Y = C + I + G, where Y is the national income in autarky situation, C is the level of domestic consumption, I is the investment in national level, and G is the amount of government expenditure. In the view of Michelis and Iacoviello (2016), the Abenomics gives three way stimuli to the economy through fiscal, monetary, and structural stimulations. The fiscal stimulations can be in the form of tax reduction, which increases the consumption C. The monetary stimulus usually comes in the form of increasing money supply or reduced interest rate. As stated by Zhang and Whitley (2013), it increases both the consumption C and investment I in the economy. The structural reforms done by the government comes in the form of improving infrastructure which represents the government pending G. The three way stimulus is thus prepared for increasing the total value of (C + I + G) or Y, the total national income. As stated by Cesa?Bianchi, Cespedes and Rebucci (2015), the three way stimulus or Abenomics thus presents the way of providing stimulation in the economy of Japan which will infiltrate every peer and level of the countrys economy. The situation can be depicted in the figure below: As the figure above shows, the government policies increase C, I, and G. As stated by Taylor (2015), it increases the level of income from Y to Y3. The Business Cycle concept shows how Japans economy climbs on to its peak and falls from it. As the figure above shows, the economy of Japan goes in and out of peak frequently. Even after the three way stimulus introduced by Shinzo Abe, the economy rides the expansion to the peak and then falls through recession to the Trough. As stated by Toru Fujioka (2016), the countrys economy has shown roller coaster behaviour as shown in the figure below: In the figure above the yellow bars represent negative expansion or retraction of the Japans economy. The orange bars represent the increase of the Japans economy. As the cabinet office has forecasted the economy of Japan is going to face a new dip in the economy, it is coloured in red. According to Eichengreen (2016), this forecast has the potential of ruining the official potential of the economy. The inflation rate in the country is falling down and riding the economy frequently. The overall average rate of inflation in the country is maintained by the government of Japan. The rate is designed in such a way that it will benefit the economy of Japan to grow. The Abenomics is not showing a change of high magnitude for the last few years. According to the purchasing power parity, the country is ranked fourth in the world. This show even with the rapid fluctuations in the growth rate and frequent deflations, the countrys purchasing power is pretty high. In the view of Kojo et al. (2013), one of the reasons behind this is strong domestic currency. Price of goods in Japan changes from quartile to quartile. The economy goes to the top to the bottom fast. The changes in the interest rate of the country can be done less frequently in order to reduce the uncertainty in the countrys economy. This will reduce the uncertainty in the economy and the investors will feel safe in investing in the countrys production process. In the view of Fukuda (2015), the government of Japan is trying to control the fluctuations in the growth of the country. But the results have not changed much, which brings in a question that whether the Abenomics is at all helpful for the economy. The policies taken by Shinzo Abe have not yet shown the promised agenda. As described by Hausman and Wieland (2014), although the stimulus three arrows were chosen in such a way that the investment in the country increases both for the domestic and for foreign investment earning sectors, the overall scenario remained similar to the pre-Abenomics period. The Abenomics can increase the amount of the stimuli in the period of negative forecasting. This will help the country to avoid fluctuations in the growth of the countrys economy. This will also provide the country enough resources to increase its Gross Domestic Product. The negative forecasting of reduction in the growth rate reduces the confidence on the economy of the investors. This re sults in low level of investment and low output. The positive forecasting initiative can help the producers to understand where to produce and how much to produce in order to earn positive outcomes of the economy. The unemployment rate of a country can be divided into three categories, namely, frictional unemployment, cyclical unemployment and seasonal unemployment. In the case of the cyclical unemployment, people lose employment due to economic fluctuations in the country. The frictional unemployment is that type of unemployment where people are between two jobs and are unemployed for a short period. The structural unemployment occurs when the skill required by the employer and the skill set that is provided by the employee do not match. As stated by Koo (2013), in the case of Japan, the unemployment rate is 3.2 percent. The previous years unemployment rate was 3.54 percent. The country has almost fifteen percent of its population below the poverty line. The total number of the existing labour force is nearing seventy million. In the view of Jakobsen (2014), the countrys four percent employed persons are involved in the agricultural sector. The percentage is reducing every year. More than twe nty-six percent of the labour force of the country is involved in the industrial sector. The service sector of the country gives employment to around seventy percent of the total labour force present in the country. The type of unemployment in the country is not easy to determine. The country is improving its production technologies through a strong research and development wing. According to Mankiw (2014), these technological improvements were supposed to create structural unemployment in the country. But the government of Japan has ensured that these technological jumps were not disruptive in nature. Instead these jumps are more inclusive. This reduced the problem of structural unemployment in the country. The number of people in the country, who are unemployed due to frictional unemployment, is proportionately less. Those people who are in middle of two jobs fall under this category. The problem of unemployment in the country mainly comes from the cyclical unemployment. The reason behind this is the frequent ups and downs of the growth rate of the economy. The country moves fast through the curves of business cycle. This property of the countrys economy throws people out of their employment a gain and again. According to the views of Yoshino and Taghizadeh (2014), the countrys government has tried to make sure that the fluctuations in the economy do not make people unemployed. To ensure this the government of Japan has increased the amount of investment in the country through Abenomics. The government of Japan has taken various measures to reduce unemployment in the country. The countrys most of the workforce is employed in the service sector. The government of Japan can take more class specified actions in order to reduce the number of people who are living below the poverty line. This will increase the overall well being in the country. The inclusion of the people who are lying below the poverty line in the production processes will ensure more growth in Japans Gross Domestic Product. Conclusion: In conclusion it can be said that the economy of Japan has improved from its previous problems. But the economic fluctuations in the countrys economy have not stopped yet. The president of Japan, Shinzo Abe has adopted a three way stimulus policy for the economy. Its purpose is to increase the growth in the country by providing fiscal stimulation, monetary stimulation, and structural changes. These changes have put the countrys economy in the third place in world. But the cyclical fluctuations in the economy have not stopped yet. The recent data that has been produced by the authorities have shown that even with the Abenomics, the country is still suffering from frequent ups and downs in the economy. The unemployment rate is low in the country than most of the developed nations, though the growth rate of the countrys Gross Domestic Product very often sees negative growth rate. The other macroeconomic variables of the country show that the countrys unemployment rate is reducing with government taking appropriate measures. The country has minimum number of unemployed persons who were not able to find jobs because of frictional unemployment and structural unemployment. The countrys economic performance fluctuations are the reason of creating a cyclical unemployment in Japan. Almost seventy percent of the labour force is absorbed in the production processes of the service sector. The industrial sector has absorbed around twentysix percent of the total labour force. The rest are employed in the agricultural sector. 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