Below is a useful graph from ANZ Bank which looks at the breakdown of components that make up GDP in New Zealand. The GDP of a country is made up of four things: C+I+G+(X-M).
C = Private Consumption
I = Business Investment
G = Government Consumption
(X-M) = Net Exports
Notice the movement in GDP over the years with the GFC in 2008 where exports revenue brought economic growth into positive territory. However up to 2020 it was private consumption that was the most prevalent with investment. COVID-19 saw a significant downturn with consumption and investment again helping GDP. Overall, domestic demand is set to get smaller, but the exports services such as education and tourism and less demand for imports should counterbalance the lack of domestic demand – see the graph. But the RBNZ has signaled that in order to get inflation down they need the domestic economy to experience a recession (two consecutive quarters of negative GDP) with private consumption falling significantly.
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Historically China’s economic model was based on export-led growth, massive government injections into the economy and access to cheap money. This is not sustainable and although you can keep blowing up bridges and build cities that nobody lives in at some point it becomes unsustainable. Furthermore since the global financial crisis economies have increased protectionist policies to look after their own economy. Therefore the Chinese government need to refocus the growth of the economy on domestic consumption rather than building things – Gross Fixed Capital Formation. So much more C than I in the GDP Expenditure equation. EG:
GDP = C↑+ I↓+ G + (X-M)
The chart below from the BNZ shows that Consumption ( C ) accounts for just 35% of the Chinese economy which is significantly below what is apparent in the developed world. Domestic Consumption in the US economy is over 70% of GDP. It will take many years for China to get near this level of consumption.
Below is a chart from the National Australia Bank publication “AustralianMarkets Weekly”. It is interesting to see how each area contributes (or has a negative impact) to US growth. This is particularly useful when doing GDP Expenditure approach in Unit 5 of teh A2 course where you can breakdown the equation C+I+G+(X-M).
Some points to note:
* Consumption has started to increase from the negative status it had post GFC.
* Net exports after being positive in early 2009 have dropped into negative status with only small positive changes of late
* Business investment has started to creep into a positive contributor to GDP
* Government contributions to GDP have varied during the period with a negative impact in 2010 and 2011 before assisting GDP in Q3 2012.