The Economist produced a graph showing world GDP data and made the following points:
- India and China account for 65% of world growth
- Emerging markets contributions in 2016 were down to its lowest figure since 2008 – falling commodity prices would have been a factor
- Norway contributed less to global GDP with lower oil prices being prevalent.
- USA with increased government spending and greater export volumes improved its position
- Brazil has been in negative territory since mid 2014 – interesting point with significant government spending on hosting the Football World Cup and the Olympics.
Maybe a good starter for your classes asking the question who contributes most to world GDP?
On the 8th November last year India’s Prime Minister, Narendra Modi, announced that all 500 and 1000 rupee notes could no longer be used as a medium of exchange – this accounts for 86% of cash in circulation. These notes could be exchanged for new ones by the end of the 2016.
Why did they outlaw the use of 500 and 1000 rupee notes?
- The main motivation was to remove the country of shadow economy millionaires hoarding of illegal cash. It is estimated that the shadow economy accounts for 20% of India’s GDP.
- Demonetisation increases the use of electronic banking allowing better tracking by tax authorities.
- The printing of new denomination money would hopefully inflate away the value of illegal cash in the shadow economy.
- Encourage people to deposit cash in the bank where it would earn interest
- Greater tax revenue for the government by firms declaring their earnings. This additional money could be used for infrastructure projects as well as tax incentives for companies.
What have been the problems?
- The Reserve Bank of India hasn’t been able to print the new money fast enough to replace the $207bn in rupees. There has been almost no new cash in rural banks and therefore keeping millions of farmers deposits that total $46bn. With limited cash in rural areas prices have collapsed.
- Factories in some cities have closed as employers can’t pay their workers although some have resorted to giving supermarket coupons to keep workers on the job.
- A dentist in an affluent part of Delhi has found a 70% fall in business since the cash ban.
- Outside the major cities cash transactions are very common and not recognising 500 and 1000 rupee notes provides a significant monetary shock for those areas
- Not all the shadow economy can move to a more legal environment with demonetisation and this represents a potential loss of economic activity.
- A shortage of cash has led to small businesses having to shut down.
In the long-run the forced priming of bank accounts and the switch to electronic payments will mobilize more money for lending and taxes.
Venezuela also became a country mostly without cash on December 16, sparking scattered protests and looting around the country as people fumed at having their already limited purchasing power cut off almost entirely.
As the nation’s most widely used banknote went out of circulation, the higher-denomination bills that were supposed to replace the 100-bolivar note had not yet arrived at banks or ATMs. That forced people to rely on credit cards and bank transfers or to try to make purchases with bundles of hard-to-find smaller bills often worth less than a penny each. The government was forced to delay the withdrawal of the 100-bolivar banknote until January 2. The graphic shows the volume of bank notes that are required to make $10m – Venezuela needs 14 sizable trucks to carry the 100-bolivar banknotes.
Source: The Economist – December 3rd 2016
A HT to my good friend Kanchan Bandyopadhyay for this piece in ‘The Times of India’. Amid the global economic gloom, triggered by a slowing Chinese economy, most economists maintained that India’s growth prospects were brighter than those of other emerging markets. Here are a list of reasons:
1. GDP growth estimated at 8% in 2015-16. India considered a bright spot in global economy
2. Improving industrial output: Up 3.8% in June compared to 2.5% in May
3. Healthier government finances: Improved tax collections, led by indirect tax growth of 37.6% during April-July Lower subsidy bill due to falling oil prices; expected savings may be around Rs 1 lakh crore
4.Inflation, both retail and wholesale, under control. Retail inflation estimated at 3.8% in July; wholesale inflation at -4.1%, the ninth straight month of contraction
5. Better than expected monsoon rains; deficit of around 11% but distribution has been encouraging
6. Lower trade deficit due to a fall in import bill for crude petroleum, gold
7. Current account deficit appears more manageable at 1.3% of GDP in 2014-15 compared to 1.7% in 2013-14
8. Forex reserves at a record $355 billion
9. Early signs of increase in investment
10. Healthy demand in consumer sectors, uptick in consumption
Here is a very informative graphic – The Elephant v The Dragon.
You will no doubt come across the 3 methods of calculating GDP that is in the macro syllabus of most courses. Here are the main features of each.
National Income measures the value of output produced within the economy over a period of time. One of the key economic objectives of government is to increase the level, and rate of growth, of national income. Before we start to analyse why economic growth is so important, it is important to be able to define the key concepts.
GROSS DOMESTIC PRODUCT (GDP)
Under new definitions introduced in the late 1990s, Gross Domestic Product is also known as Gross Value Added. It is defined as the value of output produced within the domestic boundaries of the NZ over a given period of time, usually a year. It includes the output of foreign owned firms that are located in NZ, such as the majority of Trading Banks in the market – ASB, National, ANZ etc. It does not include output of NZ firms that are located abroad. There are three ways of calculating the value of GDP all of which should sum to the same amount since by identity:
NATIONAL OUTPUT = NATIONAL INCOME = NATIONAL EXPENDITURE
1. THE EXPENDITURE METHOD
This is the sum of the final expenditure on NZ produced goods and services measured at current market prices (not adjusted for inflation). The full equation for calculating GDP using this approach is:
GDP = Consumer expenditure (C) + Investment (I) + Government expenditure (G) + (Exports (X) – Imports (M))
GDP = C + I + G + (X-M)
2. THE INCOME METHOD
This is the sum of total incomes earned from the production of goods and services. By adding together the rewards to the factors of production (land, labour, capital and enterprise), we can see how the flow of income in the economy is distributed. The rewards to the factors of production can be loosely summarised in the following table:
Land – Rent
Labour – Wages and Salaries
Capital – Interest
Enterprise – Profit
Only those incomes generated through the production of a marketed output are included in the calculation of GDP by the income approach. Therefore we exclude from the accounts items such as transfer payments (e.g. government benefits for jobseekers allowance and pensions where no output is produced) and private transfers of money.
The income method tends to underestimate the true value of output in the economy, as incomes earned through the black economy are not recorded.
3. THE OUTPUT MEASURE OF GDP
This measures the value of output produced by each of the productive sectors in the economy (primary, secondary and tertiary) using the concept of value added.
Value added is the increase in the value of a product at each successive stage of the production process. For example, if the raw materials and components used to make a car cost $16,000 and the final selling price of the car is $20,000, then the value added from the production process is $4,000. We use this approach to avoid the problems of double-counting the value of intermediate inputs. GDP will, therefore, be equal to the sum of each individual producer’s value added.
Problems of accuracy:
Officially data on a nation’s GDP tends to understate the true growth of real national income per capita over time e.g. due to the expansion of the shadow economy and the value of unpaid work done by millions of volunteers and people caring for their family members. There may also be errors in calculating the cost of living
The scale of the informal “shadow economy” varies widely across countries at different stages of development. According to the IMF, in developing countries it may be as high as 40% of GDP; in transition countries of central and Eastern Europe it may be up to 30% of GDP and in the leading industrialised countries of the OECD, the shadow economy may be in the region of 15% of GDP.
It is believed that in 2009 Indians held more money is Swiss banks than people from all other countries combined.
– A 2010 study by the World Bank has suggested that India’s shadow economy is equivalent to 20% of GDP.
– Research indicates that 85% of jobs in India are typically cash orientated.
– Only 42,800 people declare income of over 10m rupees a year – only 2.5% of Indians pay income tax.
Mumbai has a huge stock of empty apartments held as investments, their owners unwilling to to sell for fear that the proceeds might enter the formal economy and be taxed.
Source: The Economist. March 23rd 2013
No doubt you have come across the movie documentary “Black Gold” which looks at the global coffee industry focusing on the plight of coffee farmers in Southern Ethiopia. The Indian onion market has similar characteristics and it is the farmers that lose out the most. Here are some of the issues that they have encountered:
* Higher rural wages have pushed up farmer’s costs
* Farms are small and therefore lack potential economies of scale
* The supply chain involves 5 middlemen who take their cut on the way through
* The onion is loaded, sorted or repacked at least 4 times
* Retail prices are double what farmers get
* Poor quality onions get dumped as there is no modern food-processing industry in India where they could be put to use.
* Little stock of onions is held in reserve so prices can vary greatly
Foreign food companies, including Walmart, Carrefour and Tesco, have been keen to make inroads into the Indian market. This would undoubtedly reduce the number of middlemen who take their cut on the way through and the development of modern storage facilites would assist in stabilising onion prices.
If you are revising exchange rates here is a video clip from AlJazeera. India’s rupee has plunged more than 3.6 percent to a new record low against the US dollar amid deepening economic woes.
The rupee, one of Asia’s worst-performing currencies this year, breached 68.75 against the dollar in morning trade on Wednesday, after sliding three percent a day before.
The rupee has now fallen about 19 percent so far this year, by far the biggest decliner among the Asian currencies tracked by Reuters. The need to attract foreign capital is critical for a country whose record high current account deficit is a key reason behind the rupee’s slump.
Yet policymakers have consistently struggled to come up with measures that can convince markets they can stabilise the currency and attract funds into the country.
Those comments came after the government approval of infrastructure projects were overtrumped by concerns about the fiscal deficit after India’s lower house of parliament this week approved a 1.35 trillion rupees plan to provide cheap grain to the poor.
That failure is becoming an increasing source of tension for India at a time when fears of a possible US-led military strike against Syria are knocking down Asian markets, with the prospect that the Federal Reserve will end its period of cheap money as early as next month further raising concerns.
The Economist recently did a Special Report on India and one of the problems that it mentioned was the lack of a manufacturing sector. Unfortunately unlike the rest of South-East Asian economies over 50% of the workforce are still involved in the agricultural sector. However it is interesting to see the breakdown of GDP per sector:
Service sector makes up 59% of GDP and is still expanding,
Agriculture 19% and
The Economist suggests that more factories could provide jobs that would ease the pressure of 13m people that join the Indian workforce every year. What are the issues regarding its expansion:
* Bureaucracy and a poor infrastructure
* Labour costs are relatively high compared to other East Asian countries
* High cost of credit
* Weaker ruppee makes it advantageous for overseas companies to base their production
But there seems no prospect of a big leap in Indian manufacturing in the near future. And if services are to keep expanding, the country needs huge quantities of skilled labour that will not be easy to come by.
Source: The Economist – September 29th 2012