Production output performance analysis

Discuss about the Real Gross Domestic Product Growth.

Indonesia as a country has vast potential that for the large part of the last century was unnoticed by the international fraternity. The country’s economy is the ninth largest economy in the world in PPP terms and has posted a stellar economic performance in the recent times backed by vibrant domestic demand and consumer confidence. As a result, during the peak of the global financial crisis when the other economics had negative GDP growth, Indonesia was the world’s second fastest growing economy only next to China (Elias and Noone, 2011). In the above backdrop, the aim of the given report is to analyse the economic performance of Indonesia during the period 2004-2013 with the use of macroeconomic indicators for conducting an analysis of the labour, price and production output. The scope of this report not only reflects on the performance but also defines the various indicators use and reflects on the measures taken by the government with regards to resolving the various issues.

Performance indicators

The various performance indicators of output performance are discussed below.

Real Gross domestic product (GDP)

It is a value which sums up the market value at constant prices of the total goods and services that are produced in the nations within a given timeframe which normally is the financial year (Mankiw, 2012).

Real GDP growth rate

The above value highlights the percentage change in the GDP at constant prices during a given period which is usually quarter or year. This is a faithful indicator of the economic growth registered by a particular country.

Per capita GDP

This parameter is a reliable estimator of the standard of living of the residents of the country.

Per capita GDP = Real GDP/National Population

A growth in GDP on a per capita basis augers well for continuous improvement in iving standards of the people (Hoover, 2012).

Real GDP

It is apparent from the above graph that the GDP has continuously increased in the given period. In this regard, the GDP numbers in the aftermath of the global financial crisis are particularly impressive which indicate the overall resilience of the Indonesian economy from external shocks. The lowest GDP level was witnessed in 2004 when it stood at IDR 340,865.2 billion while the highest GDP level was that at the end of period i.e. 2013 which stood at IDR 2,353,207.6 billion (TradingEconomics, 2016).

Performance output measures – Indonesia Trends

It is impressive to see that during the given period, the real GDP growth has been in excess of 4% with the lowest value of 4.1% visible at the peak of the global financial crisis. The global financial crisis had limited influence on Indonesia as the economy is more driven by domestic demand and hence actually attracted huge capital in the aftermath of the crisis. The highest growth rate recorded in the period is 7.2% at the end of 2004 (TradingEconomics, 2016).

The per capita GDP is showing an increasing trend during the given period with an increasing rate of increase in almost all years except 2009. This is evident of the fact that growth in Real GDP exceeds the growth in national population. Also, the lowest per capita GDP was witnessed in 2004 and stood at USD 2,420.58 while the highest levels was witnessed in 2013 and stood at USD 3,570.93 (TradingEconomics, 2016).

It is evident that Indonesia has witnessed robust economic growth that is captured by the various parameters listed above. The growth trend did not reverse even during the global financial crisis as the economy had limited dependence on exports unlike other Asian economies. The economic growth is primarily on account of strong domestic growth fuelled by the rising standards of the domestic people as indicated in the per capita GDP growth. There has been constant rise in the consumer confidence which has reflected in increased spending by consumers. Further, a stable policy and political regime during the period also attracted significant capital especially from 2010 onwards which also led to economic growth and further rise in purchasing power of customers.

In order to enhance, the output performance, the government has played a key role of enabler in the following manner (Elias and Noone, 2011).

• The government has simplified regulations and opened the economy so as to attract more foreign capital and provide a spur to the economy.
• Investments in infrastructure have been done so as to enhance the cost competitiveness of exports from Indonesia. These investments include both soft and hard infrastructure investment.
• Cheap credit has been provided to various SME’s along with entrepreneurs so as to enhance the overall output and leverage the available resources.
• The government is increasingly focus on services sector development through prudent measures so that there is a shift from the agriculture to services.
• During the economic crisis in 2008-2009, accommodative monetary policy along with prudent fiscal measures were deployed to keep the domestic demand robust.

Unemployment – Types and Causes

Unemployment occurs when an individual is finding a job but due to various reasons he/she is not getting any job opportunity. Unemployment is considered a major macroeconomic indicator to measure the economic status of the economy of a country as it is a key resource especially for a labour intensive economy such as Indonesia (McTaggart, Findlay & Parkin, 2012).

Unemployment rate – Indonesia

It is evident from the graph above that the unemployment rate peaked at 11.6% in mid-2005 and has continued to decline since then till 2013 to reach a level of below 6%. In 2013, due to slowing economic growth, the unemployment rate has marginally increased to 6.1%. Robust economic growth which continued even during the global financial crisis is the main driver of the decreasing unemployment rate in Indonesia  (TradingEconomics, 2016).

• Frictional
• Structural
• Cyclical

Detailed Performance trends – Indonesia

Frictional unemployment arises in the country when an individual leaves the job to search a suitable job and thus become unemployed (Mankiw, 2012). When there is a change in the process, technology or especially in the industry then the existing workforce do not have the caliber or requisite knowledge to sustain in the change hence, structural unemployment increases (Goodwin et al., 2013).  Cyclical unemployment results when there is a variation in the business cycle and hence fall in the demand of the work force due to plummeting in the demand for goods and services (Weale & Christodoulakis, 2015).

The major unemployment that exists in Indonesia is structural unemployment especially in the urban areas where there is high unemployment amongst the college and university graduates who do not get jobs as per their skills since the services sector has only recently started catching up. Most of the employment still is provided by the agriculture sector (Indonesia-Investments. 2015).

Cyclical unemployment is low since the economy has been growing at a robust pace in the last decade. Further, frictional unemployment is comparatively lower in Indonesia since people cannot afford to remain jobless by choice for long and also unemployment continue to be high (Pigou, 2013).

In order to tackle the menace of unemployment, the government has taken several positive measures which are expected to continue in the future. These measures have been highlighted below (G20, 2014).

• Improving rural infrastructure so as to stimulate jobs and cause a shift from the burdened agriculture sector.
• Providing a stable policy regime, cheap financing to SME’s along with lesser regulation to foster the growth of manufacturing sector.
• National Entrepreneurship program has been launched so as to provide training and support to young graduates to start small and medium businesses.
• There has been a massive revamping of public vocational training centres so as resolve the issue of labour mismatch along with enhancing the labour productivity and quality.

Inflation – Definition, inflation trends and cause

Inflation

Inflation is a situation in which the price of the products and services is increasing from their base rate which results reduction in the purchasing power of the particular currency of the country. Inflation rate is a percentage rate of the change in the Consumer Price Index (CPI) on yearly basis. This inflation rate provides an estimate of % change in the price of the products in a year (McTaggart, Findlay & Parkin, 2012).

It is evident from the trend above that inflation has persistently remained high. The highest inflation level realised during the given period was 17.1% in 2005 while the lowest levels were at the height of the global financial crisis in 2009. However, despite this the lowest inflation level is 2.5%. Further, in 2013, there is an increase in inflation which has exceeded 9% which is much higher than the central bank’s inflation target 4% +/- 1% (TradingEconomics, 2016).

There are two primary causes of inflation

• Increase in the demand of goods
• Increment in the cost of goods or service

On the basis of the causes of inflation, it can be divided into two basic types namely cost-push and demand pull inflation.

Production output performance – Steps adopted by the Government

Manufacturing cost is a combination of four factors land, capital, labour and entrepreneurship. Enhancement in the manufacturing cost of any product leads to increase the market price and is termed as cost-push inflation. Hence, there would be shortfall in the supply of a product at the previous specified rate (Mankiw, 2012).

One of the reasons of demand pull inflation is full employment because when the economy of a country is sustainable enough to provide full employment to the people, it results in higher wages to the people. Thus, the purchasing power of the individual increases but market does not have enough supply to cater to this increased demand, hence the price increases (McTaggart, Findlay & Parkin, 2012).

Indonesia has faced high inflation due to below mentioned reasons (UNAND, 2013).

• High amount to fuel subsidies which continue till the present and thus whenever there is rationalisation of these subsidies due to higher fuel prices, there is high inflation which was the case in 2005 when the inflation surged more than 17%.
• High economic growth coupled with increasing per capita income levels has contributed to higher demand from consumers, which has led to inflation.
• Currency fluctuation due to inflows and outflows of foreign money especially from 2010 onwards.
• Rising food inflation (especially due to high price of rice) which contributed to the overall inflation in an intermittent manner.

The various measures taken by the government to tackle inflation are mentioned below (Manurung, 2013).

• Indonesia has implemented a restrictive monetary policy by hiking rates so as to cool down demand
• Further, the government has embarked on initiatives to remove the structural issues with regards to supply constraints (especially with regards to rice) with the help of State Logistics Agency (Sambijantoro, 2014).
• Measures for rationalisation of fuel subsidies in a gradual manner so that they are brought down to sustainable levels and hence do not provide inflation spikes.

Conclusion

It is apparent on the discussion above that Indonesia has performed very well with robust economic growth during the period 2004-2013. The economic growth of the nations was unperturbed by the global financial crisis and as a result lot of foreign investors were attracted towards Indonesia. The unemployment in the country has also declined on the back of economic growth which increases the demand for labour coupled with proactive measures on the part of the government. However, structural unemployment still continues to be high, hence more needs to be done in this regard, Inflation has been persistently high in the given period partly due to robust economic growth. The faulty fuel subsidies along with food inflation have also contributed to sudden surges in inflation and it is expected through coordinated efforts of the government and central bank, this would be controlled.

References

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