UFP Economics and Finance (Business & Marketing Research Paper)

UFP Economics and Finance
COMPARATIVE ECONOMIC GROWTH AND LIVING STANDARDS
RUSSIA AND THE UNITED STATES
Name: Zhihua Zhang
CEG No: 08116050
Tutor: Sally Wang
Word Count: 2195
Date of Submission: March 18, 2021
Contents
Research TopicsPage No.
1 Comparative Economic Growth and Living Standards 3
2 Overview: GDP and Major Sectors 3
3 Government Policies that Stimulate Economic Growth 7
4 Standards of Living 8
5 Comparison and Analysis 12
6 Contribution of Economic Growth to Standards of Living 15
7 Conclusion 15
8 References 17
Comparative Economic Growth and Living Standards: Russia and the United States
Economic growth plays an important role in both developed and developing countries as it can be used to assess the health of an economy. According to Endovitsky and Popkova (2018, p.139), developed countries use economic growth to establish and maintain economic dominance and leadership, while developing countries use economic growth to improve their economic position and standards of living. To understand how different countries fare economically, a comparison of economic growth and standards of living between countries is necessary. The purpose of this paper is to compare the economic growth and living standards of Russia and the United States (U.S.). An examination of each country's major economic sectors, government policies, and standards of living will be conducted using various indicators. Then, the extent to which economic growth contributes to standards of living will be established based on the comparison and analysis.
Overview: GDP and Major Sectors
               Different sectors of the economy play a role in promoting economic growth. Below is a description of the key sectors that drive economic growth in both Russia and the U.S.
Russia
               Russia is an emerging economy that has enjoyed moderate economic growth in the past. However, Russia's Gross Domestic Product (GDP) annual growth declined steadily beginning in 2010 from 4.5% to -1.973% in 2015 (World Bank, 2019). The negative GDP growth rate in 2015 was attributed to a decline in the prices of oil (Mau & Ulyukaev 2015, p.19). Also, the global financial crisis that occurred in 2008 contributed to the general decline of Russia's GDP growth rate. However, the GDP annual growth rate rose steadily and reached 2.536% in 2018, as shown in figure 1 below (World Bank, 2019). This was attributed to an increase in oil prices, global growth, and Russia's ability to bounce back from a prolonged recession (World Bank, 2020).
               The energy sector is one of the key sectors that drive economic growth in Russia (Trading Economics, 2020). Russia is a leading producer of oil and natural gas. According to Organisation for Economic Co-operation and Development (OECD) (2020), 36% of Russia's federal budget came from oil and natural gas in 2016. This percentage rose to 39.3% in 2019 (Kulachnskaya et al. 2020, p.2). Also, the energy sector accounted for 24.3% of Russia's GDP in 2019. The services sector contributes more than 50% of the country's GDP, followed by the industry sector, which contributes close to 30% of the GDP (Plecher, 2020). The agriculture sector contributes the least percentage to the country's GDP, as shown in Figure 2.
Figure 1: Russia's Annual GDP Growth (%)
Source: (World Bank, 2019)
Figure 2: Russia's GDP Distribution by Economic Sector (%)
Source: (Plecher, 2020)
U.S.
The U.S. is one of the highly developed economies in the world and exhibits characteristics of a mixed economy. Over the past decade, the U.S. has experienced a positive GDP growth rate, although the rate has fluctuated, as shown in Figure 3. However, the U.S. economy, like many other world economies, experienced a decline in 2020 following the COVID-19 pandemic. According to Trading Economics (2020), the GDP shrunk by 3.5%, and such a huge decline has not been experienced since 1946. The service sector accounts for the highest share of the country's GDP, contributing to more than 70 %. This is followed by the industry sector, which contributes about 20% to the GDP and the rest comes from the agricultural sector. Figure 4 shows the distribution of the GDP by sector.
Figure 3: U.S. Annual GDP Growth (%)
Source: (World Bank, 2019)
Figure 4: Russia's GDP Distribution by Economic Sector (%)
Source: (Statista Research Department, 2021)
Government Policies that Stimulate Economic Growth
Russia
Russia's fiscal policy has contributed to the growth of the economy. While there have been contractions within the last decade, the country has worked towards curbing some of the challenges that hinder economic growth. As indicated earlier, Russia relies heavily on oil and natural gas (Trading Economics, 2020). Oil is a major export commodity in Russia. However, the prices of oil are volatile and often fluctuate, thus affecting Russia's economy when effective measures have not been put in place (World Bank Group, 2020 p.14). To deal with this issue, Russia put in place a fiscal rule. The rule stipulates that the government restricts its use revenues generated from the exportation of gas and oil when the prices are $40 per barrel (Mau 2018, p.101). This restriction aims at reducing Russia's overdependence on oil and gas, thus ensuring economic stability. As a result, Russia experienced efficient budgetary spending (Mau 2018, p.101) and has been able to focus on areas of the economy that need attention. Also, a recent report by the World Bank Group (2020, p.14) indicates that Russia's economy would have suffered severely in 2020 following the decline in oil prices due to the Covid-19 pandemic were it not for the fiscal rule. However, Russia's countercyclical fiscal policy during the pandemic has led to the relaxation of the fiscal rule to allow the government to increase its spending from oil and gas revenues during the pandemic (World Bank Group, 2020 p.25). The countercyclical fiscal policy has been in terms of loans and guarantees and increased spending by the government. This is aimed at stimulating and re-establishing economic growth in 2021.
U.S.
       The U.S. has also applied its fiscal policy to promote economic growth. According to the Congressional Research Service (2020), the U.S. has been applying an expansionary fiscal policy for decades to drive economic growth. This has been through reduced tax revenues and increased government expenditure. However, government spending has been different over the years based on the decisions made by Congress each year. As a result of the fiscal stimulus, the U.S. economy has experienced expansion from 2009 to 2019 (Congressional Research Service, 2020). The fiscal policy in the U.S. was strengthened at the onset of the Covid-19 pandemic to ensure that the country gets back up from the recession caused by the pandemic. The government has applied fiscal stimulus by increasing unemployment benefits, infusing cash directly to consumers, and issuing small businesses excusable loans (Congressional Research Service, 2020). This fiscal policy has aimed to improve the economic activity in the country and keep the economy from shrinking.
Standards of Living
Russia
               In the first half of the decade, Russia's inflation rate rose significantly to above 15% in 2015 (OECD 2018, p.178). However, the inflation rate declined steadily from 16% in 2015 to below 5% in 2018 before rising again in 2019. Figure 5 shows the rate of inflation in the last decade.
Figure 5: Russia's Inflation Rate (%)
Source: (OECD 2018, p.178)
Russia's unemployment rates have been below 10% for the last decade, as shown in Figure 6, although they rose considerably between 2014 and 2016.
Figure 6: Russia's Unemployment Rate (%)
Source: (OECD 2018, p.179)
Russia's GDP per capita has increased considerably in the last half of the decade, as shown in figure 7 below.
Figure 7: Russia's GDP per Capita
Source: (Trading Economics, n.d.)
The standards of living in Russia can be considered as improving based on the recent increase in the GDP per capita within the last half of the decade. The rates of inflation and unemployment have declined, albeit with some minor incremental periods. However, the standards of living in Russia are still low. According to the OECD, Russia falls below average in terms of the quality of life based on the OECD Better Life Index.
U.S.
               The unemployment rates in the U.S. have declined steadily in the last decade, as shown in figure 8, from 9.6% in 2010 to 3.7% in 2019.
Figure 8: U.S. Unemployment Rate (%)
Source: (Trading Economics, 2020)
Figure 9 below shows the US GDP per capita for th...