Comments on GDP and Savings Rate - Essay Example

Business studies - Economics Introduction Economics is an important branch of social science which deals with the production, distribution, and consumption of goods and services. For convenience economics is mainly classified into two broad categories like Macroeconomics and Microeconomics. While Macroeconomics studies the entire economic activities of a country or region Microeconomics studies the economic parameters at a micro level. Microeconomics interprets economic activities based on the supply and demand theory. One of the major duties of microeconomics is to evaluate the market mechanisms like relative prices, market failures, perfect competition, monopoly etc. Sloman (2006) has explained that demand is limitless and is related to wants. Moreover, if goods and services were free, people would simply demand whatever they wanted. Supply on the other hand has limits. It is related to the resources available to the firms (Sloman, 2006, p.5). Growth, inflation, unemployment, GDP etc are some of the areas in which microeconomics is mostly interested in. This paper mainly focus on Gross Domestic Product (GDP) and its effects on a country’s economic growth and personal wellbeing. What is GDP? Mankiw & Taylor (2006) have mentioned that GDP is a measure of total income of a nation (Mankiw & Taylor 2006, p.464).They also pointed out that GDP is the total market value of all final goods and services produced within a country in a given period of time (Mankiw & Taylor 2006, p.466). It is calculated based on the total consumer investment and government spending, plus the value of exports, minus the value of imports (GDP, n. d). The following formula can be used to calculate the GDP of a country in given financial year. Y = C + I + E + G where Y = GDP, C = Consumer Spending, I = Investment made by industry, E = Excess of Exports over Imports, G = Government Spending (Calculating GDP, n. d). From the above equation it is clear that when the import increases the GDP decreases whereas when the consumer spending, investment made by industries, and governmental spending increases, the GDP also increases. The current recession (Recession is a phenomenon in which the output in the economy declines or the growth becomes negative (Sloman, 2006, p.6)), has forced people to think twice before lavishly spending their moneys. Westerners who normally spend more than what they earn has already started to save some money for the future after visualizing the negative impacts of recession. But from the above formula it is evident that too much saving can drastically affect the GDP. GDP is a measure of standard of living in a country even though many economic Gurus have different opinions. The GDP performances of United State in the recent years can be studied with respect to the chart given below. (Comments on GDP and Savings Rate, n. d) From the graph given above it is clear that GDP of United States has come down a lot in the recent years. In fact it started to show a negative growth from the third quarter of 2008 onwards. The problem was worst during the fourth quarter of 2008 and started to stabilize thereafter. The 2008 global financial crisis was the major reason for the decline in GDP as far as US is concerned. Many people lost their jobs and forced to cut down their personal expenditure because of recession which again doubled the problem. Cutting down of expenditure has resulted in less demands for the goods services produced and the less demand forced the manufacturers to produce less. In other words, the domestic production has decreased considerably because of less demand and the GDP growth started to enter into its negative phase of growth. Does GDP correctly describe personal economic well being? Growth is usually measured in terms of growth in GDP. The problem is that there are many “goods and bads” that are not included in GDP (Sloman, 2006, p.378). GDP usually says nothing about the individual wellbeing. GDP usually refers only the growth of the country as a whole. Education, health, personal wellbeing etc have not much importance in calculating the GDP figures. GDP figures can be used to compare the growth patters of nations. But these growths may not reflect in the personal wellbeing. Ecological problems, crime rates and suicidal rates etc which normally associated with the personal wellbeing is not accounted in the GDP calculations. For example, India is a country which is marked as one of the better developing economies as far as GDP growth is concerned. But the suicides related to poverty, debts and unemployment are increasing in India even though on papers its GDP is growing. The four components of economic well-being are, effective per capita consumption flows,(includes consumption of marketed goods and services, and effective per capita flows of household production, leisure and other unmarketed goods and services), net societal accumulation of stocks of productive resources(includes net accumulation of tangible capital, housing stocks and consumer durables, net changes in the value of natural resources stocks; environmental costs, and net change in level of foreign indebtedness, income distribution - poverty and inequality) and economic insecurity (economic security from job loss and unemployment, illness, family breakup, poverty in old age) (Osberg & Sharpe, n. d, p.5 &6) Per capita consumption of goods need not be a measure of the wellbeing of the public. If the distance between the rich and poor is high, GDP cannot reflect the living standards of an average person in a country. GDP refers the per capita income of a person based on the population and domestic production. Suppose a country consists of 1000000 people and among them 10000 are highly rich and the rest are poor. This country may have a higher GDP growth which may not reflect in the living standards of the normal public. On the other hand if the same country has only 10000 poor people, then the GDP growth can more accurately predict the living standards of the common public. In some countries people work more than the normal eight hours and in some other countries the retirement ages are more than the other countries. In both the above situations the GDP may mark higher standards whereas same thing cannot be said about the wellbeing of the public. Another major contributor to GDP growth is the unpaid work. It consists of household works, volunteer works etc. Moreover, in many countries the managerial staff forced to work overtime without any overtime allowances as part of their commitments towards the organization. In all the above cases, such unpaid works will often contribute to the GDP growth whereas the living standards may not improve much because of that. Does GDP adequately explain the overall economic well being of a country? “The GDP shows how well a particular country is doing economically”(What is GDP, Definition of GDP, Define GDP, What is Real GDP, What is GDP Growth, 2010). I belong to the country, Qatar and I think it is better to answer the above question with respect to the GDP facts and figures of my country Qatar. Some of the prominent economic figures of Qatar are given below. GDP (2007): $63.8 billion. Real growth rate (2007): 12.5%. Per capita income (2007): $67,000. Natural resources: Petroleum, natural gas, fish. Agriculture: Accounts for less than 2% of GDP. Industry: Types--oil production and refining and natural gas development (60% of GDP), mining, manufacturing, construction, and power. Trade (2006 est.): Exports--$34 billion (Background Note: Qatar, 2010) Hydrocarbons account for more than 50 per cent of Gross Domestic Product (GDP), approximately 85 per cent of export revenues, and 70 per cent of government earnings of Qatar. Hydrocarbons have made Qatar the second highest per-capita income nation (Economy watch, 2010). “Qatar is expected to see a nine percent growth in its gross domestic product growth in real terms in 2009 despite the global economic slowdown”(Sambidge, 2009) From the above statistics it is clear that the GDP growth figures can reflect the economic growth of a country. The figure given above explains that Qatar has second highest per capita income in the world. In other words, each citizen of Qatar may have a substantial living standards compared to other people in the world. Moreover Qatar is the richest country in the Muslim world. At the same time when we consider Qatar as a country, I cannot say that Qatar is one of the topmost developed economies in the world. Many other countries with less per capita income like America, or UK are far ahead than Qatar as far as the economic standards and the living standards are concerned. Moreover, Qatar is a country which spends less for developing military power which helped them to maintain steady GDP growth. But if some attacks come against Qatar from external sources, neither the economy nor the GDP growth may come to the rescue for the people of Qatar. In short, GDP alone cannot be taken as the measure for considering the economic growth, stability and power of a country. Conclusions GDP can certainly reflect the measure of economic developments happening in a country. But it cannot accurately account for the living standards, power and stability of a country. There are lot of economic indicators like unpaid work and the distance between the rich and the poor etc which are omitted while calculating the GDP. In short, GDP growth can certainly give us the direction in which the country is progressing, but it cannot accurately predict the living standards of the people. References 1. Background Note: Qatar, (2010), Retrieved on March 16, 2010 from http://www.state.gov/r/pa/ei/bgn/5437.htm 2. Calculating GDP, (n. d), Retrieved on March 16, 2010 from http://www.mindtools.net/GlobCourse/formula.shtml 3. Comments on GDP and Savings Rate, (n. d),. Retrieved on March 16, 2010 from http://www.windchimecapital.com/index.php/economic-indicators/comments-on-gdp-and-savings-rate 4. Economy watch, (2010), Qatar Economic Statistics and Indicators, Retrieved on March 16, 2010 from http://www.economywatch.com/economic-statistics/country/Qatar/ 5. GDP (n. d), Retrieved on March 16, 2010 from http://www.investorwords.com/2153/GDP.html 6. Mankiw, Gregory N and Taylor, M. (2006) Economics, Publisher: Thomson Learning (January 25, 2006) 7. Osberg Lars & Sharpe Andrew, (n. d) Comparisons of Trends in GDP and Economic Well-being – the Impact of Social Capital, Retrieved on March 16, 2010 from http://www.oecd.org/dataoecd/5/32/1824740.pdf 8. Sambidge Andy (2009), Qatars GDP predicted to grow by 9% in 2009, Retrieved on March 16, 2010 from http://www.arabianbusiness.com/553385-qatars-gdp-predicted-to-grow-by-9-in-2009 9. Sloman, J. (2006) Economics (6th edition), Publisher: Prentice Hall.  10. What is GDP, Definition of GDP, Define GDP, What is Real GDP, What is GDP Growth (2010), Retrieved on March 16, 2010 from http://in.88db.com/chennai/Knowledge/Knowledge_Detail.page/Business-Services/?kid=1710 Read More