Impact of Gross Domestic Product (GDP) on Economic Development of A Country

A Pilot Study on the Research Topic:
IMPACT OF GROSS
DOMESTIC
PRODUCT (GDP)
ON ECONOMIC
DEVELOPMENT

Author: Muhammad Asif Khan
Enrollment Number :MAS/PAD/EP-24672/2013
Examination Seat Number:1332025
Submitted To: Nasir Shamsi
Degree: Post Graduate Diploma in
Public Administration (PGDPA),
Equivalent to MAS (Previous), 2013-14.
From: Department of Public
Administration (DPA),
University of Karachi,
Sindh, Pakistan.

Back Ground Of The Study
• Economic development involves growth in the economic
wealth of an economy.
• Government policy in many countries generally aims for
continuous and sustained economic growth, so that their
economies expand and become more developed.
• Many less developed countries lack the capital required to
invest in modern infrastructure such as road and power
networks, and they also lack the consumer demand
required to stimulate investments in an industrial base and
service sector.
• Instead, less developed countries tend to depend heavily
on agriculture for employment and incomes.
• It is the one of the reason of slow economic growth in
these countries.

Problem Statement
• Is the Gross Domestic Product (GDP) the only and the
authentic economic indicator to measure the economic
development of a country?
And
• The difference between the less developed and developed
economies is their GDP growth
Or
• The government should consider other economic
indicators for the sustainable economic growth and
development?

Significance of Study
• The study reveals that how the economic growth
of the countries can be measured.
And
• How the other economic indicator describes the
social well-being of the people of a country.

Hypothesis
Ho: Gross Domestic Product (GDP) is the
authentic economic indicator to measure the
economic well being of the country in
addition to the people of the country.
HĄ: Gross Domestic Product (GDP) is not the
authentic economic indicator to measure the
economic well being of the country in
addition to the people of the country.

What is
Gross Domestic Product (GDP)?
Gross Domestic Product (GDP) is the value of
aggregate or total production of goods and services in a
country during a given time period-usually one year.
How it is calculated?
Two fundamental concepts from the foundation on
which GDP measurements are based:
• The distinction between stocks and flows
• The equality of income, expenditure, and the
value of production.

The Distinction Between Stocks And
Flows
Stock and Flows
To keep track of our personal economic transactions and the
economic transactions of a country, we distinguish between stocks
and flows.
Stock:
A stock is a quantity that exists at a point in time. The water in a
bathtub is a stock. So are the numbers of the current deposits (CDs)
that, are you own and the amount of money in your savings accounts.
Flow:
A flow is a quantity per unit of time. The water that is running from
an open faucet into a bathtub is a flow. So, are the number of current
deposits (CDs) that you buy during a month and the amount of
income that you earn during a month.

Flows
GDP has another flow, it is the value of the goods and services
produced in a country during a given time period usually a year.
Capital and Investment
Capital:
The key macroeconomic stock is Capital. Capital is the
plant, equipments, buildings, and inventories of raw
materials and semi finished goods and services. The
amount of capital in the economy is crucial factors that
influence GDP.
Two macroeconomic flows changes the stock of capital:
• Investments, and
• Depreciations.

Flows
Investment:
Investment is the purchase of new plant, equipment, and
buildings and the additions to inventories. Investment
increases the stock of capital.
Depreciation:
Deprecation is the decrease in the stock of capital that
results from wear and tear and the passage of time.
Another name for depreciation is capital consumption.

Flows
The total amount spent on adding to the stock of capital
and on replacing depreciated capital is called Gross
Investment.
The amount spent an adding to the stock of capital is
called Net Investment equals Gross Investment minus
Depreciation.
Net investment = Gross Investment - Depreciation

Flows
Wealth and Saving:
Wealth:
Another macroeconomic stock is wealth, which is the
value of all the things that people own. What people
own, a stock, is related to what they earn a flow. People
earn an income, which is the amount they receive during
a given time period from supplying the services of
factors of production. Income can be either consumed
or saved.
Consumption Expenditure is the amount spent on
consumption goods and services.

Flows
Saving:
Saving is the amount of income remaining after meeting
consumption expenditures. Saving adds to wealth and dissaving
(negative saving) decreases wealth.
• National wealth and national saving work just like
personal savings.
• The wealth of a nation at the start of a year equals its
wealth at the start of the previous year plus its saving
during the year.
• Its saving equals its income minus its consumption
expenditure.
Nation’s Saving = Income - Consumption Expenditure

The Equality of Income, Expenditure
and Value of Production:
The circular flow of income and expenditure helps us to see the
economy as whole income equals to expenditure and also equals
the value of production.
To keep track of the different types of flows that make up the
circular flow of income and expenditure, they are color-coded.
• The red flows are expenditures on goods and services,
• The blue is income, and
• The green flows are financial transfers.

The Circular Flow of Income and Expenditure in
the Economy
Diagram:

• In the circular flow of income and expenditure, households
receive incomes (Y) from firms (blue flows) and make
consumption expenditures (C), firms make investment (I),
governments purchase goods and services (G), the rest of the
world purchase net exports (NX) – (red flows).
• Aggregate income (blue flow) equals aggregate expenditure
(red flows).
• Households’ savings (S) and net taxes (NT) leak from the
circular flow. Firms borrow to finance their investment
expenditures, governments and the rest of the world borrow
to finance their deficits or lend their surpluses (green flows).

In the circular flow of income and expenditure consists
of four sectors:
– Households
– Firms
– Governments
– Rest of the world
It has been three aggregate markets:
– Factors Markets
– Goods and Services Markets
– Financial Markets

Measuring Gross Domestic Product
(GDP)
Gross Domestic product (GDP) is the value of aggregate
production in a country during a year.
• Production can be valued in two ways:
– By what buyers pay for it,
– By what it costs producers to make it.
• From the viewpoint of buyers, goods are worth the prices
paid for them.
It will be a real nuisance if these two values are different
because we will then have two different measures of
GDP.
• But if these two values are always equal, we will have a
unique concept of GDP regardless of which one we use.

(GDP)
Fortunately, the two concepts of value do give the same
answer.
Let’s see, why it’s happening?
Expenditure Equals Income:
Y = C + I + G + NX
Or
Aggregate Income (Y)
equals to (=)
Aggregate Expenditure (C + I + G + NX)

(GDP)
How investment is financed in The Economy:
National Savings:
Y = C + S + NT
And household saving is:
S = (Y – NT) – C
Aggregate income minus net taxes (Y – NT) is called disposable
income, so household saving equals disposable income minus
consumption expenditure.

(GDP)
National Savings:
National Savings equals household savings plus government savings:
National Savings = S + (NT – G)
But because household savings equal disposable income minus
consumption expenditure:
National Savings = (Y – NT) – C + (NT – G)
Now we can say that the net taxes cancel in the above equation.
Households pay then and government’s receive them, so when we add
household saving and government saving together, they wash out and we
are left with
National Savings = Y – C – G

(GDP)
National Savings:
National Savings = Y – C – G
National Savings equals aggregate income (GDP) minus consumption
expenditure minus government purchases.
Borrowing From The Rest Of The World:
• If the rest of the world spends more on our goods and services than we
spend on theirs, they must borrow to pay the difference.
• That is, if the value of exports (EX) exceeds the value of imports (IM),
then we can lend to the rest of the world an amount equal to (EX – IM).
In this situation, part of national saving flows to the rest of the world
and is not available to finance investment.

(GDP)
Borrowing From The Rest Of The World:
• Conversely, if we spend more on foreign goods and services than the
rest of the world spends on our, we must borrow from the rest of the
world to pay the difference.
• That is, if the value of imports (IM) exceeds the value of exports (EX),
then we must borrow from the rest of the world an amount equal to (IM
– EX). In this case, part of the rest of the world’s saving flows into the
economy and becomes available to finance investment.

(GDP)
Investment Financing:
The total funds available to finance investment equals national saving, S +
(NT – G), plus borrowing from the rest of the world, (IM – EX).
This amount equals investment. That is,
I = S + (NT – G) + (IM – EX)
That is, investment (I) equals household saving (S) plus government saving
(NT – G) plus borrowing from the rest of the world (IM – EX).

(GDP)
Injection And Leakages:
• The flow of factor incomes equals the flow of expenditures. But some
liquid leaks from the circular flow.
• The leakages from the circular flow are saving, net taxes, and imports.
For the flows to not run dry there must also be some injections into
circular flow.
• The injections are investment, government purchases of goods and
services, and exports.
I = S + (NT – G) + (IM – EX)
• Add government purchases (G) and export (EX) to both sides of this
equation and we get:

(GDP)
Injection And Leakages:
I + G + EX = S + NT + IM
INJECTIONS LEAKAGES
• The left side is injections into the circular flow of income and
expenditure, and the right side is leakages from the circular flow.
• Now, we analyze that how Economic Staticians of countries use the
circular flow of income and expenditure to measure GDP.

(GDP)
Measuring The GDP of Country
To measure the GDP of a country, economic staticians uses two
approaches:
– Expenditure Approach
– Factor Approach
The Expenditure Approach:
The expenditure approach measures GDP by collecting data on
consumption expenditure (C), investment (I), government purchases of
goods and services (G), and net exports (NX).
It can be explain in the tabular form:

(GDP)
It can be explain in the tabular form:
GDP: The Expenditure Approach:
Item Symbol
Amount
(In Billions)
Percentage of
GDP
 Personal Consumption Expenditure
 Gross Private Domestic Investment
 Government Purchases of Goods and Services
 Net Exports of Goods and Services
C
I
G
NX
xxx
xxx
xxx
xxx
x %
x %
x %
x %
Gross Domestic Product Y XXX X %

(GDP)
The Factor Incomes Approach:
The factor incomes approach measures GDP by adding together all the incomes paid by
firms to households for the services of the factors of production they hire--wages for
Labor, interest of capital, rent for land and profits paid for entrepreneurship. Let’s
elaborate how the factor incomes approach works.
The National Income divides factor incomes into five categories:
• Compensation of Employees
• Net Interest
• Rental Income
• Corporate Profits
• Proprietors’ Income

(GDP)
GDP: The Factor Incomes Approach:
Item
Amount
(in Billions)
Percentage of GDP
 Compensation of Employees
 Rental Income
 Corporate Profits
 Net Interest
 Proprietors’ Income
 Indirect Taxes
(Less: Subsidies)
 Capital Consumption
(Less: Depreciation)
xxx
xxx
xxx
xxx
xxx
xxx
xxx
x%
x%
x%
x%
x%
x%
x%
Gross Domestic Product XXX X%

(GDP)
Net Domestic Product To Gross Domestic Product:
• If we total all the factor incomes and then add indirect taxes and
subtract subsidies, we arrive at net domestic product at market price.
What do the words Gross and Net mean?
• The word Gross means before subtracting depreciation - the decrease
in the value of the capital stock that results from wear and tear and the
passage of time. Similarly, the word Net means after subtracting
depreciation.
• A component of aggregate expenditure is gross investment – the
purchase of new capital and the replacement of depreciated capital. So
when we total all the expenditures, we arrive at a number that includes
that amount of depreciation, a gross measure.

(GDP)
Net Domestic Product To Gross Domestic Product:
• A component of aggregate factor income is the net profit of the
business-profit after subtracting the depreciation of capital. So, when
we total all the factor incomes, we arrive at a number that excludes
depreciation, a net measure.
• The above given table summarizes these calculations and explains how
the factor income leads to the same estimate of GDP as the expenditure
approach.

(GDP)
The Price Level And GDP
The price level is the average level of prices of products measured by a
price index.
The two main price indexes that are used to measure the price level are:
– The Consumer Price index
– The GDP Deflator

(GDP)
The Consumer Price Index (CPI):
A consumer price index (CPI) measures changes in the price level of a
market basket of consumer goods and services purchased by households.
Calculating the CPI for a single item:
CPI = Updated Cost X 100
Base Period Cost

(GDP)
The GDP Deflator:
The GDP Deflator measures the average level of prices of all the goods
and services that are included in GDP.
To calculate the GDP deflator, we use the formula:
GDP Deflator= Nominal GDP X 100
Real GDP

(GDP)
The GDP Deflator:
Diagram:

(GDP)
Unemployment And GDP
Unemployment occurs when employed people losing or leaving their jobs
(job losers and job leavers) and from people entering the labor force
(entrants and re-entrants).
The Anatomy Of Unemployment:
People become unemployed if they:
– Lose their jobs
– Leave their jobs
– Enter or reenter the labor force
People end a spell of unemployment:
– Are Hired or recalled
– Withdraw from the labor force

(GDP)
Labor Market Flows:

(GDP)
Types Of Unemployment:
Unemployment is classified into three types that are based on its causes.
These are:
– Frictional
– Structural
– Cyclical
First two types of unemployment belong to normal labor turnover or due
to technological change or advancement.
The third type of unemployment directly belongs to country’s economic
cycle.
Let’s analyze the same.

(GDP)

(GDP)
b) Unemployment Rate:

(GDP)
Economic Development And GDP
Economic Development involves growth in the economic wealth (can be
measured through GDP) of an economy.
The countries with low GDP are considered less developed and the
countries with high GDP are supposed to be developed.
Developed Economies:
• A developed economy is generally thought of as having large modern
farms, many firms of different sizes, producing and selling a variety of
goods and services, a well-developed road and rail network, modern
communication systems, stable government and a relatively healthy,
wealthy and educated population.

(GDP)
Developed Economies:
• Developed economies are also sometimes called industrialized nations,
but this is despite the great majority of their output, income and
employment now being created by their service sectors rather than
manufacturing industries.
However, according to the United Nations there is no general rule for
designating regions or countries as developed or developing, but the
standard of living of the people of the countries.

(GDP)
Developing Economies:
• A less developed economy has a low level of economic development.
Farming methods are poor, sometimes providing scarcely enough food
for a rapidly growing population to eat.
• There are very few firms producing and selling foods and services. Road,
rail and communication networks are underdeveloped and most people
are poor.
• They live in poor housing conditions, receive little or no education, do
not expect to live to old age may even lack access to clean water to live
to old age may even lack access to clean water.
• Many countries in Africa are considered less developed.

(GDP)
Developing Economies:
• Less developed countries (LDC’s) are also called developing economies,
suggesting that overtime they are becoming a little more prosperous, that their
industrial structure is developing and fewer people are living in extreme
poverty.
• However, not all less developed countries are developing. Some are in fact
experiencing negative economic growth, meaning that incomes are falling and
levels of poverty, malnutrition and disease are rising.
• For example, between 1995 and 2004 the real GDP of Zimbabwe fell by forty
percent (40%). In contrast, some countries are developing rapidly, such as same
Eastern Europe countries such as Armenia, Georgia, but they have yet to
display the full range of characteristics of modern developed economies.
• These are often grouped under the headings emerging economies or newly
industrialized countries.

(GDP)
Reasons For Low Economic Development (GDP):
• An Over-Dependence On Agriculture To Provide Jobs And Incomes.
• Domination Of International Trade By Developed Nations:
• Lack of Capital.
• Insufficient Investment in Education, Skills and Healthcare.
• Low Levels of Investment In Infrastructure.
• Lack Of Efficient Production And Distribution For Goods And
Services.
• High Population Growth.
• Other Factors.

(GDP)
Development Indicators And GDP
The most commonly used indicators of development and living standards
in different regions and countries in the world.
Gross Domestic Product (GDP) Per Capita:
Gross Domestic Product (GDP) per capita or average income per person is
the most commonly used comparative measures of development.
Developed countries tend to have a relatively high GDP per capita.
However, GDP is a narrow measure of economic development or welfare
in a country. For example, it does not take account of what people can buy
with their incomes, access to health and education, or other non-economic
aspects such as the amount of political and cultural freedom people have,
the quality of their environment, or level of security against crime and
violence.

(GDP)
• Calculating average GDP of persons also tells us nothing about how
incomes are distributed between populations. For example, consider
China has a rapid economic growth and it had increased the number of
millionaires in the country almost 250,000 by 2006, but still around 47%
percent of the Chinese population had to survive on less than $2/= per
day, with almost 17 percent on less than $ 1 per day.
• Similarly, Saudi Arabia has a reasonably high income per head, around
$13,100/= in 2005, but most the wealth in the country is held by less
than 3 percent of the population.

(GDP)
• But even within highly developed countries such as the US there are still big
disparities rich and poor people. For example, in 2005 around 9 percent of us
households had an annual income of $ 10,000 or less compared to 6 percent
of households with $ 150,000 or more.
• Other countries such as Equatorial Guinea, Brunei or Triniland and Tobago
also have relatively high average incomes, but are generally not considered
developed because their economies depend so much on the production of oil.
• These countries also have A very unequal distribution of incomes. For
example, in 2005 the average income in Trinidad and Tobago was $16,800/=
but 39% (percent) of the population lived on less than $2/= per r day.

(GDP)
Economic Indicators Other Than GDP:

(GDP)
Economic Indicators Other Than GDP:
• Population On Less Than $1 Per Day.
• Life Expectancy At Birth.
• Adult Literacy Rate.
• Access To Safe Water Supplies And Sanitation.
• Ownership Consumer Goods.
• Proportion Of Workers In Agriculture Compared To Industry Or
Services.
• Human Development Index.
• Human Poverty Index (HPI) by United Nations (UN)

(GDP)
Research Findings
• From this research we find the GDP is a narrow measure of economic
development or welfare in a country.
• Calculating average GDP of persons also tells us nothing about how
incomes are distributed between populations.
• The research reveals that the Gross Domestic Product (GDP) only
describes the wealth of an economy as whole, but it does not reflect
economic well being of the individuals of the country.
Or,
• it is said that the GDP growth of the country does not provide accurate
information that an increase in GDP will guarantee to increase the
standard of living of the people of the country.

(GDP)
Research Findings
• It can be said that the GDP per capita is not sufficient to describe the
overall economic condition of the country. There are some other
indicators that must be considered while gauging the economic well
being of a country.
.

(GDP)
Conclusion & Recommendations
From the whole discussion following conclusions has been extracted and
over and above some recommendations has been made:
• The level of economic and human development in different economies
can be measured and compared using a range of indicators.
• Gross Domestic Product (GDP) per capita, a measure of average
income per person, is a most commonly used economic indicator, but it
does not represent the economic well-being and economic condition of
the whole population, due to unequal distribution of wealth or income
in many countries.

(GDP)
• To analyze the economic well being of the people of the country, we can
use other development indicators, therefore, such as:
– The adult literacy rate,
– Life expectancy at birth and
– The number of people earning less than 1$ per day.
• Besides these, the UN defines:
– HDI & HPI indices can be used to identify the
economic well being of the countries.

(GDP)
• The less developed economies have not to work for the size of their economy
in shape of GDP, but also have to invest in their infrastructure, education,
skills development of human and healthcare facilities.
• They have to control the growth of the population through controlling the
birth rate in their counties.
• They should have to change their traditional agricultural system and have to
introduce modern technology in agriculture to increase their crops, which not
only fulfill their own needs but they can also export these and earn income.
• They have to develop new base for the economy, which should be based on
industries.
• They can achieve this through more investment in capital goods.

(GDP)
The above, all measures will help the less developed countries to enhance their
GDP per capita, but the true economic development will be achieved through the
human development and reduction of poverty in the country.

(GDP)
Questions
&
Answers

(GDP)
Thank You!

Impact of Gross Domestic Product (GDP) on Economic Development of A Country

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