Description
study aims to find the macro-economic indicators that differentiate a developed economy from a developing one. The different parameters which have been used are: GDP Growth Rate, Components of GDP, Savings and Investments, Calculation of different multipliers – Simple Keynesian multiplier, Trade multiplier and Government Multiplier, Fiscal policy and government budget.
Economic Environment & Policy-I
Macroeconomic Analysis Of India, Germany and Brazil
1
OBJECTIVE OF STUDY
The objective of the study is to do a quantitative comparison of Income statistics of a developed and developing country on various parameters. For this purpose, we have taken Germany as the developed and Mexico as the developing country. The study aims to find the macro-economic indicators that differentiate a developed economy from a developing one. Also we will study the fiscal policies of the countries as indicated by their budget statements. Further, we compare these countries with the Indian Economy. The different parameters which have been used are: 1. 2. 3. 4. GDP Growth Rate Components of GDP Savings and Investments Calculation of different multipliers – Simple Keynesian multiplier, Trade multiplier and Government Multiplier 5. Fiscal policy and government budget The comparison is based on the last 10 years economic data of each of the countries.
2
OVERVIEW OF THE COUNTRIES
Economy of India The economy of India is the twelfth largest economy in the world by market exchange rates and the fourth largest by purchasing power parity basis. Prior to 1991, India was under social democratic-based policies since its independence in 1947. The economy was characterized by regulation, protectionism, and public ownership, leading to pervasive corruption and slow growth. The country did witness some agricultural reforms during the 1970s in the form of green revolution but the rate of growth remained slow. Since 1991, continuing economic liberalization has moved the economy towards a market-based system. A revival of economic reforms and better economic policy in 2000s accelerated India's economic growth rate. By 2008, India had established itself as the world's second-fastest growing major economy. However, the year 2009 saw a significant slowdown in India's official GDP growth rate to 6.1% as well as the return of a large projected fiscal deficit of 10.3% of GDP which would be among the highest in the world. India's large service industry accounts for 54% of the country's GDP while the industrial and agricultural sector contribute 29% and 17% respectively. Agriculture is the predominant occupation in India, accounting for about 60% of employment. The service sector makes up a further 28%, and industrial sector around 12%.The labor force totals half a billion workers. Major agricultural products include rice,wheat, oilseed, cotton, jute, tea, sugarcane, potatoes, cattl e, water buffalo, sheep, goats, poultry and fish. Major industries include textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery, information technology enabled services and software. India's per capita income (nominal) is $1016, ranked 142th in the world, while it’s per capita (PPP) of US$2,762 is ranked129th. Previously a closed economy, India's trade has grown fast. India currently accounts for 1.5% of World trade as of 2007 according to the WTO. According to the World Trade Statistics of the WTO in 2006, India's total merchandise trade (counting exports and imports) was valued at $294 billion in 2006 and India's services trade inclusive of export and import was $143 billion. Thus, India's global economic engagement in 2006 covering both merchandise and services trade was of the order of $437 billion, up by a record 72% from a level of $253 billion in 2004. India's trade has reached a still relatively moderate share 24% of GDP in 2006, up from 6% in 1985. Despite robust economic growth, India continues to face many major problems. The recent economic development has widened the economic inequality across the country. Despite sustained high economic growth rate, approximately 80% of its population lives on less than $2 a day (nominal), more than double the same poverty rate in China. Even though the
3
arrival of Green Revolution brought end to famines in India, 40% of children under the age of three are underweight and a third of all men and women suffer from chronic energy deficiency.
Economy of Germany Germany is the world's fourth-largest economy and the largest in Europe. In 2006, Germany had its best year since 2000 with 2.7% growth; in 2007, growth was at 2.5% despite a 3 percentage point value added tax (VAT) hike at the beginning of the year. In the context of the global financial crisis, economic growth slowed during 2008 and continues to slow in 2009. From the 1948 currency reform until the early 1970s, West Germany experienced almost continuous economic expansion. Real gross domestic product (GDP) growth slowed down, and even declined, from the mid-1970s through the recession of the early 1980s. The economy then experienced 8 consecutive years of growth that ended with a downturn beginning in late 1992. During most of the post-reunification period, Germany has seen relatively low average real growth and stubbornly high unemployment. The German economy is heavily export-oriented, with exports accounting for more than one-third of national output. As a result, exports traditionally have been a key element in German macroeconomic expansion, accounting for over half of the economic growth in recent years. Germany is a strong advocate of closer European economic integration, and its economic and commercial policies are increasingly determined within the European Union (EU). Germany uses the common European currency, the euro, and the European Central Bank sets monetary policy. In the early-mid 2000s, Germany adopted a complex set of labor/social welfare reforms to overcome structural weaknesses of the German welfare state and to create policies more conductive to employment. Defying a skeptical German public, the coalition government of Chancellor Angela Merkel initiated additional reform measures, such as the gradual increase in the mandatory retirement age from 65 to 67--a move that would add 2.5 million to the workforce by 2030. Subsequently, however, there has been active political debate and some rollback of these labor reforms; most notably the government decided to extend the payment period of unemployment benefits to older workers in early 2008. The United States is Germany's second-largest trading partner, and U.S.-German trade has continued to be strong. Two-way trade in goods totaled $152 billion in 2008. U.S. exports to Germany were $54.5 billion, while U.S. imports from Germany were more than $97.5 billion. At $43 billion, the U.S.'s fifth-largest trade deficit is with Germany. Major U.S. export categories include aircraft, electrical equipment, telecommunications equipment, data processing equipment, and motor vehicles and parts. German export sales are concentrated
4
in motor vehicles, machinery, chemicals, and heavy electrical equipment. Much bilateral trade is intra-industry or intra-firm. Germany has a liberal foreign investment policy. For 2007, German investment in the U.S. amounted to $202.6 billion, while U.S. investment in Germany was $107 billion.
Despite persistence of some structural rigidities in the labor market and extensive government regulation, the economy remains strong and internationally competitive. Although production costs are very high, Germany is still an export powerhouse, and unit labor costs have decreased in the last decade. Additionally, Germany is strategically placed to take advantage of the rapidly growing central European countries. The current government has addressed some of the country's structural problems, with important tax, social security, and financial sector reforms.
Economy of Mexico While Mexico's economy is mature and generally fairly stable, there is a growing income gap between the rich and the poor. Political and social unrest will grow if this disparity is not addressed. Mexico has one of the largest economies in the world, holding the twelfth position in the global list as measured by nominal gross domestic product (CIA World Factbook, 2007). The economy contains rapidly developing modern industrial and service sectors, with increasing private ownership. Recent administrations have expanded competition in ports, railroads, telecommunications, electricity generation, natural gas distribution and airports, with the aim of upgrading infrastructure. As an export-oriented economy, more than 90% of Mexican trade is under free trade agreements (FTAs) with more than 40 countries, including the European Union, Japan, Israel, and much of Central and South America. The most influential FTA is the North American Free Trade Agreement (NAFTA), which came into effect in 1994, and was signed in 1992 by the governments of the United States, Canada and Mexico. In 2006, trade with Mexico's two northern partners accounted for almost 90% of its exports and 55% of its imports. Recently, the Congress of the Union approved important tax, pension and judicial reforms, and reform to the oil industry is currently being debated. According to the Forbes Global 2000 list of the world's largest companies in 2008, Mexico had 16 companies in the list. During 2004 its GDP exceeded the trillion-dollar mark, making Mexico one of the major middle-income countries with an advanced economy. Mexico is part of the North America Free Trade Agreement (NAFTA) with the US and Canada, and this had driven its export-led economy.
5
In Latin America, Mexico has the highest per-capita income level. In the international arena, the exchange rates of the Mexican Peso are high as well, and Mexico has the highest purchasing power parity of any country in Latin America. Mexico is a middle-income country with a developing market economy that is closely linked to the much larger economy of the United States. Mexico’s economy ranks as “moderately free” in the 2008 Index of Economic Freedom (a joint publication of the Wall Street Journal and the Heritage Foundation). From the 1940s through the late 1960s, successive governments followed an economic strategy of import substitution and fiscal and monetary restraint intended to promote growth while holding inflation in check. During the 1970s, populist governments abandoned fiscal discipline and oversaw a massive expansion of consumer subsidies and state ownership of productive sectors. Unsustainable public-sector spending backed by over-reliance on oil export revenues and abundant international credit contributed to chronically high inflation and wild fluctuations in economic performance. As a result, the economy experienced spurts of rapid growth followed by sharp recessions in 1976 and 1982. The mid- to late 1980s were years of economic austerity and stagnant growth during which Mexico was able to balance its national accounts while combating high inflation. Gross domestic product (GDP) grew at an average rate of just 0.1 percent per year between 1983 and 1988. During these years, monetary policy was severely restricted and public-sector spending sharply curtailed. The late 1980s and early 1990s saw far-reaching market-oriented structural reforms, including privatization of hundreds of state-owned enterprises, liberalization of foreign investment laws, deregulation of the financial services sector, and across-the-board reductions in tariffs and nontariff trade barriers. These reforms, which culminated in the ratification of the North American Free Trade Agreement (NAFTA) in 1994, attracted an influx of US$148 billion in foreign direct investment (FDI) during the next decade. From 1988 to 1994, GDP growth averaged 2.6 percent annually, sustained by exports and an influx of foreign capital. However, the collapse of the peso in December 1994 and the ensuing economic crisis erased most of the real wage gains from the previous years. In response to the 1994 crisis, Mexico passed legislation granting greater independence to its central bank. Growth resumed in the late 1990s, but the recovery was cut short by the spillover effects of the 2001 recession in the United States. Since 2002, a worldwide commodity price boom, a U.S. economic recovery, and sound macroeconomic policies have helped boost economic growth while allowing inflation to remain in the single digits. The economy is hampered by structural weaknesses that limit Mexico’s potential for future growth and job creation. Mexico’s workers are generally low skilled and have less schooling than workers in advanced industrial economies. This deficit in human capital manifests itself in labor sector that deprives the education, health care, and social security systems of crucial tax revenues. Income distribution remains highly unequal; about half of Mexico’s population lives in poverty.
6
Despite recent reforms, some public policies continue to hold back the economy’s competitiveness and growth potential: rigid labor and commercial codes discourage hiring and inhibit informal workers from transitioning into the formal economy; the important energy sector, which remains state-owned, suffers from numerous inefficiencies and undercapitalization; and the federal government relies heavily on the oil industry for revenues, which consequently renders public budgets vulnerable to cyclical fluctuations in hydrocarbon prices. Whereas the liberalizing reforms associated with NAFTA have been a boon to northern and central Mexico’s manufacturing centers, few new jobs have materialized for the predominantly agricultural states in the south and southwest. This uneven development pattern has failed to slow large-scale wage migration to the United States. As global competition for capital investment has increased— particularly from lowcost manufacturing in Asia—Mexico’s status as a premier export hub for the North American market has eroded.
7
LITERATURE REVIEW Gross Domestic Product (GDP) The gross domestic product (GDP) is a measure of a country's economic performance. It is the market value of all final goods and services made within a country in a year. It is the value of all goods and services produced in the economy. GDP can be defined as the total expenditures for all final goods and services produced within the country in a given span of time, generally one year. Alternatively it is equal to the sum of the value added at every stage of production by all the industries within a country, plus taxes less subsidies on products, in the period. It can also be interpreted as the sum of the income generated by production in the country in the period, that is compensation of employees, taxes on production and imports less subsidies, and gross operating surplus. In essence, it can be calculated as: Gross Domestic Product = Private Consumption + Government Spending + Gross Investment + Net Exports Or simply, GDP = C + G + I + (E – M) Where C: Private consumption, G: Government Spending, I: Government Investment, E: Exports and M: Imports
The components of the GDP can be described as:
?
C (private consumption): It is generally the largest of the GDP component, consisting of private household expenditures in the economy and consists of durable goods, non-durable goods, and services. It includes food, fuel, grocery and medical expenses but does not include the purchase of new housing. G (Government spending): It is the government expenditures on final goods and services and includes salaries of public servants, purchase of military equipment, and any other expenditure by the government.
8
?
?
I (Government investment): It is the business investment in plant; equipment etc and does not include exchanges of existing assets. Examples of investment would be buying new refinery, spending on households or purchasing inventory. X (exports): It is the gross total of all the exports. It includes amount a country produces, including goods and services produced for other nations' consumption. M (imports): It is the gross imports. Imports are subtracted since they are foreign supply and their consumption inside the country should not be counted.
?
?
Gross National Product (GNP) Gross national Product is the total value produced within a country that is the gross domestic product with its net income received from other countries. The GNP consists of the personal consumption expenditures, the gross private investment, the government consumption expenditures, the net income from assets abroad (net income receipts), and the gross exports of goods and services, after deducting the gross imports of goods and services.
GDP vs. GNP GDP and GNP can be contrasted in essence that GDP defines its scope according to location, while GNP defines its scope according to ownership. GDP is product produced within a country's borders while GNP is the product produced by enterprises owned by a country's citizens. The two would be same if all of the productive enterprises in a country were owned by its own citizens, but foreign ownership makes GDP and GNP non-identical. Gross national income (GNI) equals GDI plus income receipts from the rest of the world minus income payments to the rest of the world.
Monetary Policy Monetary policy is the process by which the government, the central bank, or the monetary authority of a country controls ? ? The supply of money, The availability of money, and
9
?
The cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy.
Monetary policy is based on the relationship between the rate of interest in an economy and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate, which forms part of the monetary policy. Fiscal Policy Fiscal policy is the use of government spending and revenue collection to influence the economies, which are its two main instruments. Changes in the composition of taxation and government spending can impact the aggregate demand, pattern of resource allocation and the distribution of the income. Fiscal policy refers to the overall effect of the budget outcome on economic activity. The three possible stances of fiscal policy are neutral, expansionary and contractionary.
The Economic Multiplier In economics, a multiplier is a factor of proportionality that measures how much an endogenous variable changes in response to a change in some exogenous variable. An endogenous variable is a dependent variable that is generated within a model For example, consumption expenditure and income is considered endogenous to a model of income determination. On the other hand, exogenous variables are independent variables that affect a model without being affected by it. For example, the level of government expenditure is exogenous to the theory of income determination. Economic Multiplier is the change in a country's money supply that occurs as the result of banks' ability to lend. The multiplier effect is dependent on banks' required reserves, or the amount of money in deposits they are legally required to keep in-house. If a bank has a low reserve requirement, it is able to lend more of its deposit money, which in turn increases the money supply. This indicates a high multiplier effect. On the other hand, a high reserve requirement leads to a low multiplier effect. See also: M1, M2. The concept of Multiplier can be understood by analyzing the underlying question, By how much does a $1 change in autonomous spending raise the equilibrium level of income? Suppose first the output increases by $1 to increase the autonomous spending. This increase in output and income would in turn give rise to further induced spending as consumption rises because the level of income has risen. Out of this additional dollar, a
10
fraction c is consumed and the output thus becomes (1+c). This will give an excess demand. This will lead to a higher demand of production and again in a higher income. If we write out the successive rounds of increased spending, starting with initial increase in the autonomous demand, we obtain Total Change in Aggregate Demand, ? AD = ?A + c ?A + c2 ?A + …. ?AD = ?A (1 + c + c2 + c3 + …..) ?AD = 1/(1-c) ?A = ?Yo
The term ?Yo/ ?A is called as the multiplier and is denoted by ?. Thus the multiplier, ? =?Yo/ ?A = 1/ (1-c)
National Income Multiplier The National Income Multiplier says that an initial increase in spending can cause further rounds of spending. Therefore, the final increase in National Income is greater than the initial spending (or injection of Money) The change in equilibrium income equals the change in aggregate demand or ?Yo = ?g + c(1-t) ?Y The change in equilibrium income is ?Yo = 1/(1-c(1-t)) ?G = ?G ?G Where ?G denotes the multiplier in the presence of income taxes. ?G = 1/(1-c(1-t)) e.g if Government increase spending on the wages of nurses by $2billion. That means National Income increases by $2billion. However, if nurses spend part of their extra wages, additional output and incomes will be generated. The final increase in National Income may be $3 billion. Therefore, there is a multiplier effect of 3/2 = 1.5
11
GERMANY Table1 GDP data in million US$, constant prices (OECD base year)
Year 1999
GDP 2063803.871
Final Consumption Expenditure(C) 1602473.955
Imports of Goods investment Government & Services expenditure 453677.09 399314.83 588830.3242 463929.95 404779.34
2000
2130227.343
1658809.323
703506.9344 427557.84 406924.67
2001 2002 2003 2004
2211791.833 2275443.911 2358366.984 2467762.76
1736224.561 1778646.762 1854442.88 1918657.921
725440.0054 388494.94 709203.6245 397959.11 747008.7639 396706.5 822613.631 390582.62 413036.84 411539.16 414494.05 412915.41
2005 2006 2007 2008
2586530.869 2708676.241 2835272.824 2927714.598
2012976.705 2076585.77 2114556.327 2183621.351
926246.1405 417536.95 1074628.359 438042.66 1130034.053 462630.95 1200822.823 433073.42 424370.66 417287.03
12
Understanding the relationship of GDP of Germany with its Final Consumption Expenditure
GDP v/s Final Consumption Expenditure
GDP Final Consumption Expenditure
Calculating the Marginal propensity to consume using regression analysis. We approximate Y using the GDP data and use the data of final household consumption and GDP of past 10 years to approximate C’ and c (marginal propensity to consume) using the regression analysis. Regression Statistics R Square 0.985919 Adjusted R Square 0.984158
Intercept GDP
Coefficients 265094.9916 0.66296168
t Stat Lower 95% Upper 95% 3.826797047 105350.3961 424839.5872 23.66691233 0.59836549 0.72755787
at 95% level of significance we find that the coefficient(c) is significant. Also a high R square suggests that the change in consumption can be explained by the change in income (GDP) C= C’ + cY Final Consumption = 0.66296168*GDP + 265094.99 MPC = 0.66296168
13
Understanding the relationship of GDP of Germany with its Imports of Goods and Services
GDP v/s Imports
GDP Imports of Goods & Services
Calculating the marginal propensity to import using regression analysis: We approximate Y using the GDP data and use the data of final household consumption and GDP of past 10 years to approximate C’ and c (marginal propensity to consume) using the regression analysis. Regression Statistics R Square 0.966704149 Adjusted R Square 0.962542167
Coefficients Intercept GDP -819397.75 0.68479167
t Stat
Lower 95%
Upper 95%
7.374180402 -1075634.31 -563161.199 15.24041255 0.581176862 0.788406478
Imports of Goods & Services = .68479167*GDP – 819397.75 M= M’ + mY M = -8193977.75 + 0.68479167Y MPM = 0.68479167
14
Calculating the tax rate: We use the average of the past ten year tax data to approximate the taxation rate for the economy. For the purpose we take an average of the tax revenue as the percentage of GDP and get t= 35.9131056% t= 0.359131056
CALCULATING THE MULTIPLIERS SIMPLE KEYNESIAN MULTIPLIER Simple Keynesian multiplier = 1/1-c Using the MPC calculated above we get Keynesian multiplier to be 2.967021673 GOVERNMENT MULTIPLIER Formula for govt multiplier= 1/1-c(1-t) Using the values of c and the govt multiplier= 1.73874202 OPEN ECONOMY MULTIPLIER Formula for open economy multiplier = 1/1-c(1-t)+m Using the data calculated earlier: Trade multiplier= 0.793701113
15
MEXICO GDP data in million US$, constant prices (OECD base year)
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
GDP 924933.6 985895.74 985572.11 993180.21 1006988 1047388.1 1081771.1 1136246.8 1175254.7
Final Consumption 695023.9998 746617.0845 760961.2211 771279.4554 787137.564 821414.895 857999.0378 902077.9989 934823.7754 948089.9988
Imports of Goods & Services 243608.0832 295926.6042 291097.9992 295356.2674 297402.2472 329348.4458 357260.565 402171.3297 430310.6631 448788.843
Investment 234537.928 261865.345 251991.407 249102.285 238805.16 244593.499 248464.358 266811.034 279825.132 294702.313
Government Expenditure 102350.6994 104784.1757 102708.6791 102369.8237 103193.8215 100337.3706 102788.1321 104556.1253 106789.1491 107428.0465
Understanding the relationship of GDP of Mexico with its Final Consumption Expenditure Calculating the Marginal propensity to consume using regression analysis. We approximate Y using the GDP data and use the data of final household consumption and GDP of past 10 years to approximate C’ and c (marginal propensity to consume) using the regression analysis. GDP v/s Final Consumption
GDP Final Consumption
Regression Statistics
16
R Square Adjusted R Square
0.992204577 0.991090945
Coefficients Intercept GDP -188499.362 0.961080417
t Stat
Lower 95.0%
Upper 95.0%
5.627925123 -267699.094 -109299.63 29.84900063 0.884944064 1.037216771
at 95% level of significance we find that the coefficient(c) is significant. Also a high R square suggests that the change in consumption can be explained by the change in income (GDP) C= C’ + cY Final Consumption = 0.961080417*GDP -188499.362 MPC = 0.961080417
Understanding the relationship between Mexico’s GDP and its Imports of Goods & Services: Calculating the marginal propensity to import using regression analysis: We approximate Y using the GDP data and use the data of final household consumption and GDP of past 10 years to approximate C’ and c (marginal propensity to consume) using the regression analysis. GDP v/s Imports of Goods & ServicesRegression Statistics R Square Adjusted R Square 0.994894414 0.994165044
Coefficients Intercept GDP -439014.878 0.738293457
t Stat
Lower 95.0%
Upper 95.0%
21.11218987 -488185.771 -389843.985 36.93301013 0.691024452 0.785562461
Imports of Goods & Services = .738293457*GDP – 439014.878 M= M’ + mY
17
MPM = 0.738293457
Calculating the tax rate: We use the average of the past ten year tax data to approximate the taxation rate for the economy. For the purpose we take an average of the tax revenue as the percentage of GDP and get t= .189991
CALCULATING THE MULTIPLIERS SIMPLE KEYNESIAN MULTIPLIER Simple Keynesian multiplier = 1/1-c Using the MPC calculated above we get Keynesian multiplier to be 25.694
GOVERNMENT MULTIPLIER
Formula for govt multiplier= 1/1-c(1-t) Using the values of c and the govt multiplier= 4.514342
OPEN ECONOMY MULTIPLIER Formula for open economy multiplier = 1/1-c(1-t)+m Using the data calculated earlier: Trade multiplier= 1.041873
18
A comparison of developed and developing economies. Developed economies are those economies which have been developed in terms of resources and economic conditions . These include economies from the global north such as Germany, Britain, France, United States of America etc. These are the economies with hisg per capita income ranging from $10000 to $30000. These countries have extensive infrastructure , largely urban population and en educated and skilled labour force. The centre of economic activity in these countries has shifted from industry to services. Developing economies are those economies which are striving to come out of their social, economic and political crisis. The per capita income of these countries ranges from $1000 to $1000.They currently lack what developed economies owe such as political stability, strong economic indicators, free market system, democracy etc. The developing economies include economies of global south or rapidly emerging economies such as India, China, Brazil, Turkey etc. However underdeveloped countries are usually referred to third world countries which are in worse conditions as compared to the developing and developed countries. These economies lack political stability, face military intervention, very high poverty line, greater unemployment, greater default risks and greater economic problems. On comparing Germany with Mexico we not only look at the growth rate and the size of the GDP but also look at the sectoral composition of GDP alongwith other socio economic indicators to bring out the differences in a developed and developing economy.
Comparing Germany and Mexico: ? Comparison of the GDP of Germany and Mexico
GDP Mexico GDP Germany
19
?
Simple Keynesian Multiplier: the multiplier for Mexico is so greater than that of Germany as the consumption rate of a developing economy is high and any investment. Savings rate: the savings rate in Mexico is 10.84% and that of Germany is 7%. Mexico has a higher savings rate than that of Germany. GROWTH RATE OF GDP (%growth rate yoy basis) 2000 2001 2002 2003 0.217 31 2004 2005 2006 2007 2008
? ?
Germany 3.20 9826 Mexico 6.59 0975 1.24 0 0.032 83
1.207 682
0.753 13
3.164 741
2.465 418
1.258 15
0.771 947
1.390 264
4.011 976
3.282 733
5.035 784
3.433 052
As can be seen from the data in the table the growth rate of Mexico has been greater than that of Germany for the past four years. This is because mexico is a smaller economy as compared to Germany and grows off a smaller base giving itself a greater rate of growth. Also it is a developing economy and is at a stage where any development leads to a greater increase in GDP.
?
SECTORAL COMPOSITION OF GDP (percentage contribution of various sectors in GDP)
GERMANY YEAR SECTOR Agricultur e Services 19 99 1.1 78 8 61. 54 2000 2001 2002 2003 2004 2005 2006 2007 2008
1.137 5 61.63 35
1.166 104 62.17 24
1.084 761 62.96 66
1.027 222 63.14 10
1.312 901 62.69 81
1.140 105 63.01 93
1.069 809 62.67 75
1.028 922 63.27 69
1.054 513 75.11
20
20 Industry 21. 91 23
22.56 194
22.52 851
22.21 206
22.35 423
23.11 804
23.27 159
23.77 846
23.61 658
23.36 202
MEXICO YEAR SECTOR Agricultur e 199 9 4.2 634 41 34. 764 64 58. 813 75 2000 2001 2002 2003 2004 2005 2006 2007
4.015 061
4.254 956
4.182 509
4.283 627
4.235 853
4.073 017
4.023 139
4.079 961
Industry
34.58 164
33.36 264
33.10 327
32.63 227
32.51 776
32.36 626
32.55 033
32.26 568
Service
59.36 657
60.33 595
60.97 104
61.60 852
62.01 477
62.63 119
62.86 359
63.24 045
Looking at the sectoral composition of GDP of both Mexico and Germany following inferences can be made 1. Agriculture contributes a greater proportion of GDP in Mexixo than it does in Germany 2. Services form 3-4th of Germany’s GDP. The contribution of Services in GDP of Mexico has also been growing over time 3. Industry has a greater share in GDP of Mexico ? Investment rate (as a % of GDP) 1999 Germ any Mexi co 2000 2001 2002 2003 2004 2005 2006 2007 2008
21.98 21.77 19.82 18.01 072 842 516 388 20.47 21.38 20.18 19.90 177 726 814 559
18.4 18.21 17.79 18.44 18.88 19.69 929 472 949 413 437 658 19.7 20.46 21.28 22.25 23.05 051 246 984 208 658
21
?
SOCIO ECONOMIC INDICATORS GERMANY MEXICO 0.56 18.8 73 US$ 7990
Gini coefficient Infant mortality(per 1000) Life expectancy (in years) PER capita income
0.27 3.9 80 US$ 30400
The high Gini coefficient of Mexico suggests greater inequality in the country in terns of income distribution. Also Mexico has a higher infant mortality rate than Germany. The life expectancy in Germany is higher than that of Mexico. Confirming to the difference between a developed and developing nation, Mexico has a lower per capita income(<10000$) than that of Germany. Following conclusions can be drawn about developed and developing nations from the comparison of Germany and Mexico ? A developing nation generally has higher rate of growth of GDP than that of a developing economy. This is attributable to the comparatively smaller base of the developing economy. ? In case of a developing economy a greater portion of their income comes from agriculture and industry as compared to a developed economy. ? Developing economies have a higher income inequality and poor socio economic indicators like infant mortality rate and life expectancy ? Developing economies have a higher keynesian multiplier. ? Developing countries have a higher savings rate than that of developed countries. ? Developed economies have a higher per capita income than that of developing economies.
22
INDIAN GDP AND ITS TRENDS
INDIA
GDP India
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1952035 2030710 2136650 2217134 2402728 2602065 2844942 3120031 3402716 3644011
Imports of Goods & Services
265702 277710 285444 320535 364824 445870 628983 782976 837015 1070168
Final Consumption
1506387 1551850 1634837 1673357 1763745 1850690 1980383 2102984 2277701 2464977
Government Investment Expenditure
506244 511788 520656 618035 759325 1011212 1272630 1521805 1845513 252744 265088 281786 290978 310297 338052 375562 421546 479099 603318
Understanding the relationship of GDP of INDIA with its Final Consumption Expenditure
GDP India Final Consumption
Calculating the Marginal propensity to consume using regression analysis. We approximate Y using the GDP data and use the data of final household consumption and GDP of past 10 years to approximate C’ and c (marginal propensity to consume) using the regression analysis.
23
Regression Statistics:
R Square Adjusted R Square 0.994903 0.994266
Coefficients Intercept 466959.3512 GDP 0.536459063
t Stat Lower 95% Upper 95% 12.76173416 382581.305 551337.3973 39.51562785 0.505153049 0.567765077
at 95% level of significance we find that the coefficient(c) is significant. Also a high R square suggests that the change in consumption can be explained by the change in income (GDP) C= C’ + cY Final Consumption = 0.536459063 *GDP + 466959.3512 MPC = 0.536459063 Understanding the relationship of GDP of INDIA with its Imports of Goods and Services
GDP India Imports of Goods & Services
Calculating the marginal propensity to import using regression analysis: We approximate Y using the GDP data and use the data of final household consumption and GDP of past 10 years to approximate C’ and c (marginal propensity to consume) using the regression analysis.
24
Regression Statistics R Square Adjusted R Square 0.972436 0.968991 Lower 95% -889632 Upper 95% -540619
Coefficients t Stat
Intercept -715125 GDP 0.471691
-9.44997
16.79992 0.406945 0.536436
2000 GDP at Factor Cost 1 Agriculture, Forestry & Fishing 2 Mining & Quarrying 1786525
2001 1864300
2002 1972605
2003 2048287
2004 2222759
2005
2006
2007 2871120
2388768 2616101
24.99349
23.89117
23.99102 21.43088 21.71522 20.21586 19.53724
18.5055
2.328207
2.28445
2.196841 2.302802 2.187642 2.201595 2.108634
2.0911
3 Manufacturing 14.78362 4 Electricity, Gas & Water Supply 5 Construction 6 Trade, Hotels & Restaurants 7 Financing, Insurance, Real Estate & Business Services
15.26423
14.79277 15.21686 14.95272 15.11721 15.05454 15.33175
2.492324 5.7098
2.437322 5.812477
2.3435 2.364073 2.282524 2.291767 2.198424 2.108724 5.712852 5.939109 6.1286 6.623163 7.028322 7.158983
21.69094
22.29518
23.0075 24.24914
25.0306 25.78103 26.39038 27.12865
13.07286
13.03696
13.2179 13.74563 13.37302 13.52496 13.75666 14.26175
25
8 Community, Social & Personal Services Gross Capital Formation (% of GDP) Growth Rate
14.92881 28.3368
14.97822 26.21134
14.73762
14.7515 14.32967 14.24441
13.9258 13.41351
24.0519 27.04914 29.30349 33.21984 36.25548 37.39945
-
4.353424
5.809419 3.836653 8.517947 7.468601 9.516747
-
Imports of Goods & Services = .471691*GDP – 715125.75 M= M’ + mY MPM = .471691 GDP data in Rs crore Sorce:indiastat
India has been growing at 2nd greatest rate next to China at 9%.. The investment rate has also increased to 39.34043 percent. The savings rate in India is 34.8%.
COMPARING INDIA WITH GERMANY As can be seen from the data the growth rate of Indian GDP is higher than that of Germany. India also has a higher value of the simple Keynesian multiplier that explains the higher rate of growth in the country. India derives around 20 % of its GDp from agriculture as against 1.8% incase of Germany. However the share of income from services is witnessing a sharp increase in case of India. India has had a peculiar growth path as compared to other developing economies. Unlike other developing economies India saw a sudden jump from agriculture to services rather than moving to industry first as has been the case with other developing economies across the globe. The investment rate of India is quite similar to that of Germany. Coming to the social parameters: india has a lower life expectancy, greater inequality nad infant mortality and a lower per capita income as compared to that of Germany. Everything combined leads to a conclusion that India is a developing country and confirms to the differences that persist between a developed and a developing nation.
26
SOCIO ECONOMIC INDICATORS GERMANY Gini coefficient Infant mortality(per 1000) Life expectancy (in years) PER capita income 0.27 3.9 80 US$ 30400 INDIA 0.34 55 64.8 US$ 700 (approx)
COMPARISION OF INDIA AND GERMANY ON BASIS OF FISCAL POLICY Fiscal Policy can be defined as Government revenue and expenditure policy which is implemented by altering taxes and/or government spending. This differs from Monetary Policy which is carried out by the Central Bank and relates to money supply and interest rates. Here we will be comparing fiscal policies of India, Germany and Belgium. Fiscal Policy of India The Union Budget 2008-09 was presented in the backdrop of impressive growth in the Indian economy which clocked about 9 per cent of average growth in the last four years. This striking performance coupled with significant improvement in fiscal indicators, during the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 regime definitely put the country on a higher growth trajectory inspiring confidence in the medium to long term prospects of the economy. The process of fiscal consolidation during these years has resulted in improvement in fiscal deficit from 5.9 per cent of GDP in 2002-03 to 2.7 per cent of GDP in 2007-08. During the same period, revenue deficit has declined from 4.4 per cent to 1.1 per cent of GDP.
27
FISCAL INDICATORS – ROLLING TARGETS AS PERCENTAGE OF GDP (at current market prices) Revised Budget Targets for Estimates Estimates 2007-08 2008-09 2009-10 2010-11 1. Revenue Deficit 1.4 1.0 0.0 0.0 2. Fiscal Deficit 3.1 2.5 3.0 3.0 3. Gross Tax Revenue 12.5 13.0 13.5 14.0 4. Total outstanding liabilities 63.8 59.6 55.7 52.3 at the end of the year Source: www.indiabudget.nic.in Headline inflation fell to 4.39 per cent in January, 2009. However, the fiscal measures undertaken through tax concessions and increased expenditure on food, fertilizer and petroleum subsidies along with increased wage bill for implementing the Sixth Central Pay Commission recommendations significantly altered the deficit position of the Government. Important points: ? ? ? The estimates for gross tax revenue which stand reduced from Rs 6,87,715 crore in B.E.2008-09 to Rs 6,27,949 crore in R.E.2008-09. Tax to GDP ratio increased from 8.8 per cent in 2002-03 to 12.5 per cent in 2007-08. Additional budgetary resources of Rs.1,50,320 crore provided as part of stimulus package and various committed liabilities of Government including rising subsidy requirement, provision under NREGS, implementation of Central Sixth Pay Commission recommendations and Agriculture Debt Waiver and Debt Relief Scheme for Farmers contributed to the higher fiscal deficit of 6 per cent of GDP in RE 2008-09 as compared to 2.5 per cent of GDP in B.E.2008-09. The Government increased public expenditure, even with reduced receipts, to stimulate economy by creating demand and maintain the growth trajectory which the country was witnessing in the recent past. The stock of contingent liabilities in the form of guarantees given by the government has reduced from Rs 1,07,957 crore at the beginning of the FRBM Act regime i.e. 2004-05 to Rs 1,04,872 crore at the end of 2007-08. As a percentage of GDP, it has reduced from 3.4 per cent in 2004-05 to 2.3 per cent in year 2006-07 and further to 2.2 per cent for the year 2007-08.
? ?
Revenues: ? The Gross Tax Revenue, States share and net Tax Revenue of Centre in BE 2008-09 are placed at Rs.6,87,715 crore, Rs.1,78,765 crore, and Rs.5,07,150 crore respectively, representing growth rates of 25.5 per cent, 25.5 per cent and 25.6 per cent over BE 2007-08
28
? ? ?
Direct taxes which were 43 percent of gross tax revenue in 2004-05 have gone up by 53 percent in BE 2008-09 The non-tax revenue (NTR) increased from Rs. 82,550 crore in BE 2007-08 to Rs. 95,785 crore in BE 2008-09 registering a growth of 16.0 per cent NTR which constituted 1.8 per cent of GDP in BE 2007-08, is estimated to decline to 2.0 per cent of GDP in BE 2008-09
Expenditure ? ? ? ? ? Plan Revenue expenditure is estimated to increase from Rs.1,74,354 crore in BE 2007-08 to Rs.2,09,767 crore in BE 2008-09, an increase of 20.3 per cent Non-Plan revenue expenditure is budgeted to increase from Rs.3,83,546 crore in BE 2007-08 to Rs.4,48,352 crore in BE 2008-09, an increase of modest 16.9 per cent The interest payment expenditure is projected to increase from Rs.1,58,995 crore in BE 2007-08 to Rs.1,90,807 crore in BE 2008-09, showing an increase of 20.0 per cent Total Defence Services expenditure is budgeted to increase from Rs.96,000 crore in BE 2007-08 to Rs.1,05,600 crore in BE 2008-09 The allocation for major subsidies, i.e. food, fertilizers and petroleum products is estimated to be Rs.66,537 crore in BE 2008-09 as against Rs.50,987 crore in BE 200708. The Non-Plan Grants to States/UTs in 2008-09 are placed at Rs.43,294 crore, as against Rs.38,403 crore in BE 2007-08, signifying an increase of 12.7 percent
?
Tax Policy Custom Duties ?
?
To curb the inflationary trends in the economy arising out of a rise in prices of food items, a sharp reduction was effected in the import duty rates on various food items such as semi-milled or wholly milled rice (70% to nil) and crude and refined edible oils (from 40%-75% to 20%-27.5%). On 01.04.2008, a further reduction was effected in the import duty rate- on all crude edible oils duty was reduced to nil, and on refined edible oils duty was reduced to 7.5%. Import duties on crude petroleum was reduced to nil and on petrol and diesel to 2.5% (earlier 7.5%). Customs duty on other petroleum products was reduced from 10% to 5%
29
Service Tax ? The upper limit of refund of service tax paid by exporters on foreign commission agent services has been enhanced from 2% of FOB value to 10% of FOB value of export goods.
Direct Taxes ? Distortions within the tax structure have been minimised by expanding the tax base and maintaining moderate tax rates.
Government Borrowings, Lending and Investments ? The gross and net market borrowings (dated securities and 364- day Treasury Bills) of the Central Government during 2008-09 (up to February 9, 2009) amounted to Rs 2,40,167 crore and Rs 1,68,710 crore, respectively. As part of policy to elongate maturity profile, Central Government has been issuing securities with maximum 30-year maturity. The weighted average maturity of dated securities issued during 2008-09 (up to February 9, 2009) was 14.45 years which was marginally lower than 14.90 years during the corresponding period of the previous year. The weighted average yield of dated securities issued during 2008-09 (up to February 9, 2009) was 7.91 per cent and was lower than 8.12 per cent during the corresponding period of last year.
?
30
Fiscal Policy of Germany Fiscal Indicators Estimated 2009 Provisional outturn1 January to September 2009 218.6 0.8 188.0 -2.2 164.5 -3.9 -30.6 -11.2 -0.2 -19.2
Expenditure (€ bn) Change on year in % Revenue (€ bn) Change on year in % Tax revenue (€ bn Change on year in % Financial deficit (€ bn) Cash shortfall (€ bn) Adjusted for revenue from coin (€ bn) Net borrowing/current financial market balance (€ bn)
303.3 7.4 253.8 -6.2 224.1 -6.3 -49.5 -0.4 -49.1
The new constitutional fiscal in Germany rule limits the structural deficit of the Federation at 0.35 percent of GDP and requires structurally balanced budgets for the regions (Lander). Some important trends: ? Federal expenditure up to and including September amounted to € 218.6 bn, which was € 1.8 bn (+ 0.8 %) more than last year and the spending change was +3.3% ? The Federation’s ? Interest expenditure was € 2.7 bn below the previous year's level. ? The Federation’s revenue, at € 188.0 bn, was€ 4.2 bn below the result through September2008. ? Tax receipts declined by – 3.9 % compared to the previous year ? Administrative receipts were up by + 11.3 % compared to the corresponding period in the previous year. ? The financial deficit was – € 30.6 bn, a slight increase over the previous month’s figure. ? Via investment and redemption fund , the Federation has made a total of € 20.4 bn available through 2011 for additional fast-acting economic stimulus measures.
31
Tax Policy ? ? ? ? ? Unemployment payroll taxes reduced from 6 ½ to 4 ½ percent Tax rates for an individual are 14% - 45% Municipal trade tax of 14%-17% Corporate tax is 15% Effective corporate tax rate, including trade tax and solidarity tax is about 30%-33%
32
Source: Ministry of Finance, Germany www.bundesfinanzministerium.de
33
Source: Ministry of Finance, Germany www.bundesfinanzministerium.de Tax Revenue ? ? ? ? Total tax revenue (excluding local authority taxes) declined in September 2009 by – 7.4 % on the year Revenue from joint taxes was – 8.4 % in total below last year’s level. The cumulative decline in tax revenue for the months January to September 2009 amounts to – 6.0 % in total and – 3.8 % for the Federation. Receipts from the corporation tax, fell sharply (– 52.4 %) for Sept 2009.
Source: Ministry of Finance, Germany www.bundesfinanzministerium.de
34
Fiscal Policy of Mexico Fiscal policy has been prudently guided by a framework aiming at balanced budgets and saving part of oil revenues in a stabilization fund. The framework has contributed to securing long-term sustainability and improved policy credibility. The fiscal stimulus measures in the 2009 budget and the January 2009 package to stimulate demand, which account for 1.6% of GDP. Budget revenues are projected to fall in 2010, reflecting the depressing effect of low world energy prices on oil revenue and the negative influence of the downswing on non-oil tax revenue. While oil revenue has been protected in 2009 by a hedge on oil export prices, this advantage will disappear in 2010. It is projected that the government deficit (in terms of net lending or public sector net borrowing requirement) will increase from some 3-4% of GDP in 2009 to about 5% of GDP in 2010, assuming no corrective measures to cut expenditure or raise taxes. Mexico would be able to cover this level of borrowing, including by drawing down oil stabilization funds that were accumulated during the past period of high energy prices. To help meet external financing requirements, the government has secured large sources of foreign lending from the capital market, multilateral agencies and the US Federal Reserve. Revenue (as of 2007): ? ? ? ? ? Budgetary revenues equaled 25.5 percent of GDP (2,485.6 thousand million pesos) oil revenues accounted for 35.4 percent of budgetary revenues, while the remaining 64.6 percent was made up of non-oil revenues Non-oil tax revenues rose 8.1 percent in real terms, due mainly to a 13.1 percent increase in income tax collection Revenues from the VAT rose 3.4 percent in real terms Non-oil non-tax revenues totaled 160 thousand million pesos (1.6 percent of GDP), which represented real growth of 82.1 percent
35
http://www.banxico.org.mx Expenditure ? ? Budgetary expenditures accounted for 25.4 percent of GDP (2,483.0 thousand million pesos). Public expenditure grew 5.9 percent in real terms compared to 2006 due to an increase in programmable expenditures (10.0 percent at constant prices), particularly on capital expenditures. current expenditure rose 7.3 percent at constant prices capital expenditure grew at a real annual rate of 20.5 percent and accounted for 4.3 percent of GDP non-programmable expenditure declined 5.5 percent at constant prices federalized expenditures (total federal resources channeled to state and municipal governments) exhibited a slightly growth of 1.2 percent in real terms
? ? ? ?
36
http://www.banxico.org.mx Tax Policy ? ? Corporate income tax is 34.0% Royalties, license fees or other compensation paid by a Mexican licensee to a nonresident for unpatented technology of trademarks are subject to a withholding tax at a rate of 35% Interest payments to nonresidents are subject to withholding tax rates of 15%, 21% or 4.9% or 10% for residents of a tax treaty partner, and 35%, depending on the type of payee The tax on sale of share is 20% of the gross proceeds from sale. VAT is imposed to the whole country with rate as 15% of the value of product or service. Imports are subject to VAT at a rate of 10%, assessed on the customs value of the import plus the import duty
?
? ? ?
37
Comparison of Fiscal Policies between Germany and India Fiscal Deficit: As we can see that the % fiscal deficit for Germany is much less than India as a % of GDP Fiscal Deficit as % of GDP India Germany 2.5 0.121524
Revenue as a % of GDP Revenue as a % of GDP India 24.3
38
Germany
43
Tax Revenue as a % of GDP: The below table shows that Germany gets around 31.7 % of the revenure from its taxes whereas India gets only about 20.6%. Tax Revenue as a % of GDP India Germany 20.6 31.7
39
Expenditure as a % of GDP: The below chart clearly shows that the expenditure of Germany as a % of its GDP is much higher than that of India. Expenditure as a % of GDP India 23.4 Germany 43
Interest Expenditure as a % of Total Expenditure: When we compare the % of expenditure in Interest, the below chart shows that India has a much bigger % than Germany in this regard. Interest Expenditure as a % of Total Expenditure India 20.6 Germany 15
On comparision of the fiscal policy of India and Germany, following points become evident: ? ? ? Germany like other advanced nations hasa lower fiscal defecit India has a lower tax generation implying inefficient tax policy and a less buoyant tax system Also expenditure as a % og GDp in India are less as compared to germany implying that a major portion of India’s revenues goes for the payment of debts and interest.
40
41
References: http://www.economia-snci.gob.mx http://www.oecd.org http://www.banxico.org.mx http://www.imf.org http://www.foropoliticaspublicas.org.mx www.bundesfinanzministerium.de http://www.forbes.com/ http://indiabudget.nic.in Wikipedia.org Oecd statistic Indiastat
42
doc_159003602.docx
study aims to find the macro-economic indicators that differentiate a developed economy from a developing one. The different parameters which have been used are: GDP Growth Rate, Components of GDP, Savings and Investments, Calculation of different multipliers – Simple Keynesian multiplier, Trade multiplier and Government Multiplier, Fiscal policy and government budget.
Economic Environment & Policy-I
Macroeconomic Analysis Of India, Germany and Brazil
1
OBJECTIVE OF STUDY
The objective of the study is to do a quantitative comparison of Income statistics of a developed and developing country on various parameters. For this purpose, we have taken Germany as the developed and Mexico as the developing country. The study aims to find the macro-economic indicators that differentiate a developed economy from a developing one. Also we will study the fiscal policies of the countries as indicated by their budget statements. Further, we compare these countries with the Indian Economy. The different parameters which have been used are: 1. 2. 3. 4. GDP Growth Rate Components of GDP Savings and Investments Calculation of different multipliers – Simple Keynesian multiplier, Trade multiplier and Government Multiplier 5. Fiscal policy and government budget The comparison is based on the last 10 years economic data of each of the countries.
2
OVERVIEW OF THE COUNTRIES
Economy of India The economy of India is the twelfth largest economy in the world by market exchange rates and the fourth largest by purchasing power parity basis. Prior to 1991, India was under social democratic-based policies since its independence in 1947. The economy was characterized by regulation, protectionism, and public ownership, leading to pervasive corruption and slow growth. The country did witness some agricultural reforms during the 1970s in the form of green revolution but the rate of growth remained slow. Since 1991, continuing economic liberalization has moved the economy towards a market-based system. A revival of economic reforms and better economic policy in 2000s accelerated India's economic growth rate. By 2008, India had established itself as the world's second-fastest growing major economy. However, the year 2009 saw a significant slowdown in India's official GDP growth rate to 6.1% as well as the return of a large projected fiscal deficit of 10.3% of GDP which would be among the highest in the world. India's large service industry accounts for 54% of the country's GDP while the industrial and agricultural sector contribute 29% and 17% respectively. Agriculture is the predominant occupation in India, accounting for about 60% of employment. The service sector makes up a further 28%, and industrial sector around 12%.The labor force totals half a billion workers. Major agricultural products include rice,wheat, oilseed, cotton, jute, tea, sugarcane, potatoes, cattl e, water buffalo, sheep, goats, poultry and fish. Major industries include textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery, information technology enabled services and software. India's per capita income (nominal) is $1016, ranked 142th in the world, while it’s per capita (PPP) of US$2,762 is ranked129th. Previously a closed economy, India's trade has grown fast. India currently accounts for 1.5% of World trade as of 2007 according to the WTO. According to the World Trade Statistics of the WTO in 2006, India's total merchandise trade (counting exports and imports) was valued at $294 billion in 2006 and India's services trade inclusive of export and import was $143 billion. Thus, India's global economic engagement in 2006 covering both merchandise and services trade was of the order of $437 billion, up by a record 72% from a level of $253 billion in 2004. India's trade has reached a still relatively moderate share 24% of GDP in 2006, up from 6% in 1985. Despite robust economic growth, India continues to face many major problems. The recent economic development has widened the economic inequality across the country. Despite sustained high economic growth rate, approximately 80% of its population lives on less than $2 a day (nominal), more than double the same poverty rate in China. Even though the
3
arrival of Green Revolution brought end to famines in India, 40% of children under the age of three are underweight and a third of all men and women suffer from chronic energy deficiency.
Economy of Germany Germany is the world's fourth-largest economy and the largest in Europe. In 2006, Germany had its best year since 2000 with 2.7% growth; in 2007, growth was at 2.5% despite a 3 percentage point value added tax (VAT) hike at the beginning of the year. In the context of the global financial crisis, economic growth slowed during 2008 and continues to slow in 2009. From the 1948 currency reform until the early 1970s, West Germany experienced almost continuous economic expansion. Real gross domestic product (GDP) growth slowed down, and even declined, from the mid-1970s through the recession of the early 1980s. The economy then experienced 8 consecutive years of growth that ended with a downturn beginning in late 1992. During most of the post-reunification period, Germany has seen relatively low average real growth and stubbornly high unemployment. The German economy is heavily export-oriented, with exports accounting for more than one-third of national output. As a result, exports traditionally have been a key element in German macroeconomic expansion, accounting for over half of the economic growth in recent years. Germany is a strong advocate of closer European economic integration, and its economic and commercial policies are increasingly determined within the European Union (EU). Germany uses the common European currency, the euro, and the European Central Bank sets monetary policy. In the early-mid 2000s, Germany adopted a complex set of labor/social welfare reforms to overcome structural weaknesses of the German welfare state and to create policies more conductive to employment. Defying a skeptical German public, the coalition government of Chancellor Angela Merkel initiated additional reform measures, such as the gradual increase in the mandatory retirement age from 65 to 67--a move that would add 2.5 million to the workforce by 2030. Subsequently, however, there has been active political debate and some rollback of these labor reforms; most notably the government decided to extend the payment period of unemployment benefits to older workers in early 2008. The United States is Germany's second-largest trading partner, and U.S.-German trade has continued to be strong. Two-way trade in goods totaled $152 billion in 2008. U.S. exports to Germany were $54.5 billion, while U.S. imports from Germany were more than $97.5 billion. At $43 billion, the U.S.'s fifth-largest trade deficit is with Germany. Major U.S. export categories include aircraft, electrical equipment, telecommunications equipment, data processing equipment, and motor vehicles and parts. German export sales are concentrated
4
in motor vehicles, machinery, chemicals, and heavy electrical equipment. Much bilateral trade is intra-industry or intra-firm. Germany has a liberal foreign investment policy. For 2007, German investment in the U.S. amounted to $202.6 billion, while U.S. investment in Germany was $107 billion.
Despite persistence of some structural rigidities in the labor market and extensive government regulation, the economy remains strong and internationally competitive. Although production costs are very high, Germany is still an export powerhouse, and unit labor costs have decreased in the last decade. Additionally, Germany is strategically placed to take advantage of the rapidly growing central European countries. The current government has addressed some of the country's structural problems, with important tax, social security, and financial sector reforms.
Economy of Mexico While Mexico's economy is mature and generally fairly stable, there is a growing income gap between the rich and the poor. Political and social unrest will grow if this disparity is not addressed. Mexico has one of the largest economies in the world, holding the twelfth position in the global list as measured by nominal gross domestic product (CIA World Factbook, 2007). The economy contains rapidly developing modern industrial and service sectors, with increasing private ownership. Recent administrations have expanded competition in ports, railroads, telecommunications, electricity generation, natural gas distribution and airports, with the aim of upgrading infrastructure. As an export-oriented economy, more than 90% of Mexican trade is under free trade agreements (FTAs) with more than 40 countries, including the European Union, Japan, Israel, and much of Central and South America. The most influential FTA is the North American Free Trade Agreement (NAFTA), which came into effect in 1994, and was signed in 1992 by the governments of the United States, Canada and Mexico. In 2006, trade with Mexico's two northern partners accounted for almost 90% of its exports and 55% of its imports. Recently, the Congress of the Union approved important tax, pension and judicial reforms, and reform to the oil industry is currently being debated. According to the Forbes Global 2000 list of the world's largest companies in 2008, Mexico had 16 companies in the list. During 2004 its GDP exceeded the trillion-dollar mark, making Mexico one of the major middle-income countries with an advanced economy. Mexico is part of the North America Free Trade Agreement (NAFTA) with the US and Canada, and this had driven its export-led economy.
5
In Latin America, Mexico has the highest per-capita income level. In the international arena, the exchange rates of the Mexican Peso are high as well, and Mexico has the highest purchasing power parity of any country in Latin America. Mexico is a middle-income country with a developing market economy that is closely linked to the much larger economy of the United States. Mexico’s economy ranks as “moderately free” in the 2008 Index of Economic Freedom (a joint publication of the Wall Street Journal and the Heritage Foundation). From the 1940s through the late 1960s, successive governments followed an economic strategy of import substitution and fiscal and monetary restraint intended to promote growth while holding inflation in check. During the 1970s, populist governments abandoned fiscal discipline and oversaw a massive expansion of consumer subsidies and state ownership of productive sectors. Unsustainable public-sector spending backed by over-reliance on oil export revenues and abundant international credit contributed to chronically high inflation and wild fluctuations in economic performance. As a result, the economy experienced spurts of rapid growth followed by sharp recessions in 1976 and 1982. The mid- to late 1980s were years of economic austerity and stagnant growth during which Mexico was able to balance its national accounts while combating high inflation. Gross domestic product (GDP) grew at an average rate of just 0.1 percent per year between 1983 and 1988. During these years, monetary policy was severely restricted and public-sector spending sharply curtailed. The late 1980s and early 1990s saw far-reaching market-oriented structural reforms, including privatization of hundreds of state-owned enterprises, liberalization of foreign investment laws, deregulation of the financial services sector, and across-the-board reductions in tariffs and nontariff trade barriers. These reforms, which culminated in the ratification of the North American Free Trade Agreement (NAFTA) in 1994, attracted an influx of US$148 billion in foreign direct investment (FDI) during the next decade. From 1988 to 1994, GDP growth averaged 2.6 percent annually, sustained by exports and an influx of foreign capital. However, the collapse of the peso in December 1994 and the ensuing economic crisis erased most of the real wage gains from the previous years. In response to the 1994 crisis, Mexico passed legislation granting greater independence to its central bank. Growth resumed in the late 1990s, but the recovery was cut short by the spillover effects of the 2001 recession in the United States. Since 2002, a worldwide commodity price boom, a U.S. economic recovery, and sound macroeconomic policies have helped boost economic growth while allowing inflation to remain in the single digits. The economy is hampered by structural weaknesses that limit Mexico’s potential for future growth and job creation. Mexico’s workers are generally low skilled and have less schooling than workers in advanced industrial economies. This deficit in human capital manifests itself in labor sector that deprives the education, health care, and social security systems of crucial tax revenues. Income distribution remains highly unequal; about half of Mexico’s population lives in poverty.
6
Despite recent reforms, some public policies continue to hold back the economy’s competitiveness and growth potential: rigid labor and commercial codes discourage hiring and inhibit informal workers from transitioning into the formal economy; the important energy sector, which remains state-owned, suffers from numerous inefficiencies and undercapitalization; and the federal government relies heavily on the oil industry for revenues, which consequently renders public budgets vulnerable to cyclical fluctuations in hydrocarbon prices. Whereas the liberalizing reforms associated with NAFTA have been a boon to northern and central Mexico’s manufacturing centers, few new jobs have materialized for the predominantly agricultural states in the south and southwest. This uneven development pattern has failed to slow large-scale wage migration to the United States. As global competition for capital investment has increased— particularly from lowcost manufacturing in Asia—Mexico’s status as a premier export hub for the North American market has eroded.
7
LITERATURE REVIEW Gross Domestic Product (GDP) The gross domestic product (GDP) is a measure of a country's economic performance. It is the market value of all final goods and services made within a country in a year. It is the value of all goods and services produced in the economy. GDP can be defined as the total expenditures for all final goods and services produced within the country in a given span of time, generally one year. Alternatively it is equal to the sum of the value added at every stage of production by all the industries within a country, plus taxes less subsidies on products, in the period. It can also be interpreted as the sum of the income generated by production in the country in the period, that is compensation of employees, taxes on production and imports less subsidies, and gross operating surplus. In essence, it can be calculated as: Gross Domestic Product = Private Consumption + Government Spending + Gross Investment + Net Exports Or simply, GDP = C + G + I + (E – M) Where C: Private consumption, G: Government Spending, I: Government Investment, E: Exports and M: Imports
The components of the GDP can be described as:
?
C (private consumption): It is generally the largest of the GDP component, consisting of private household expenditures in the economy and consists of durable goods, non-durable goods, and services. It includes food, fuel, grocery and medical expenses but does not include the purchase of new housing. G (Government spending): It is the government expenditures on final goods and services and includes salaries of public servants, purchase of military equipment, and any other expenditure by the government.
8
?
?
I (Government investment): It is the business investment in plant; equipment etc and does not include exchanges of existing assets. Examples of investment would be buying new refinery, spending on households or purchasing inventory. X (exports): It is the gross total of all the exports. It includes amount a country produces, including goods and services produced for other nations' consumption. M (imports): It is the gross imports. Imports are subtracted since they are foreign supply and their consumption inside the country should not be counted.
?
?
Gross National Product (GNP) Gross national Product is the total value produced within a country that is the gross domestic product with its net income received from other countries. The GNP consists of the personal consumption expenditures, the gross private investment, the government consumption expenditures, the net income from assets abroad (net income receipts), and the gross exports of goods and services, after deducting the gross imports of goods and services.
GDP vs. GNP GDP and GNP can be contrasted in essence that GDP defines its scope according to location, while GNP defines its scope according to ownership. GDP is product produced within a country's borders while GNP is the product produced by enterprises owned by a country's citizens. The two would be same if all of the productive enterprises in a country were owned by its own citizens, but foreign ownership makes GDP and GNP non-identical. Gross national income (GNI) equals GDI plus income receipts from the rest of the world minus income payments to the rest of the world.
Monetary Policy Monetary policy is the process by which the government, the central bank, or the monetary authority of a country controls ? ? The supply of money, The availability of money, and
9
?
The cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy.
Monetary policy is based on the relationship between the rate of interest in an economy and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate, which forms part of the monetary policy. Fiscal Policy Fiscal policy is the use of government spending and revenue collection to influence the economies, which are its two main instruments. Changes in the composition of taxation and government spending can impact the aggregate demand, pattern of resource allocation and the distribution of the income. Fiscal policy refers to the overall effect of the budget outcome on economic activity. The three possible stances of fiscal policy are neutral, expansionary and contractionary.
The Economic Multiplier In economics, a multiplier is a factor of proportionality that measures how much an endogenous variable changes in response to a change in some exogenous variable. An endogenous variable is a dependent variable that is generated within a model For example, consumption expenditure and income is considered endogenous to a model of income determination. On the other hand, exogenous variables are independent variables that affect a model without being affected by it. For example, the level of government expenditure is exogenous to the theory of income determination. Economic Multiplier is the change in a country's money supply that occurs as the result of banks' ability to lend. The multiplier effect is dependent on banks' required reserves, or the amount of money in deposits they are legally required to keep in-house. If a bank has a low reserve requirement, it is able to lend more of its deposit money, which in turn increases the money supply. This indicates a high multiplier effect. On the other hand, a high reserve requirement leads to a low multiplier effect. See also: M1, M2. The concept of Multiplier can be understood by analyzing the underlying question, By how much does a $1 change in autonomous spending raise the equilibrium level of income? Suppose first the output increases by $1 to increase the autonomous spending. This increase in output and income would in turn give rise to further induced spending as consumption rises because the level of income has risen. Out of this additional dollar, a
10
fraction c is consumed and the output thus becomes (1+c). This will give an excess demand. This will lead to a higher demand of production and again in a higher income. If we write out the successive rounds of increased spending, starting with initial increase in the autonomous demand, we obtain Total Change in Aggregate Demand, ? AD = ?A + c ?A + c2 ?A + …. ?AD = ?A (1 + c + c2 + c3 + …..) ?AD = 1/(1-c) ?A = ?Yo
The term ?Yo/ ?A is called as the multiplier and is denoted by ?. Thus the multiplier, ? =?Yo/ ?A = 1/ (1-c)
National Income Multiplier The National Income Multiplier says that an initial increase in spending can cause further rounds of spending. Therefore, the final increase in National Income is greater than the initial spending (or injection of Money) The change in equilibrium income equals the change in aggregate demand or ?Yo = ?g + c(1-t) ?Y The change in equilibrium income is ?Yo = 1/(1-c(1-t)) ?G = ?G ?G Where ?G denotes the multiplier in the presence of income taxes. ?G = 1/(1-c(1-t)) e.g if Government increase spending on the wages of nurses by $2billion. That means National Income increases by $2billion. However, if nurses spend part of their extra wages, additional output and incomes will be generated. The final increase in National Income may be $3 billion. Therefore, there is a multiplier effect of 3/2 = 1.5
11
GERMANY Table1 GDP data in million US$, constant prices (OECD base year)
Year 1999
GDP 2063803.871
Final Consumption Expenditure(C) 1602473.955
Imports of Goods investment Government & Services expenditure 453677.09 399314.83 588830.3242 463929.95 404779.34
2000
2130227.343
1658809.323
703506.9344 427557.84 406924.67
2001 2002 2003 2004
2211791.833 2275443.911 2358366.984 2467762.76
1736224.561 1778646.762 1854442.88 1918657.921
725440.0054 388494.94 709203.6245 397959.11 747008.7639 396706.5 822613.631 390582.62 413036.84 411539.16 414494.05 412915.41
2005 2006 2007 2008
2586530.869 2708676.241 2835272.824 2927714.598
2012976.705 2076585.77 2114556.327 2183621.351
926246.1405 417536.95 1074628.359 438042.66 1130034.053 462630.95 1200822.823 433073.42 424370.66 417287.03
12
Understanding the relationship of GDP of Germany with its Final Consumption Expenditure
GDP v/s Final Consumption Expenditure
GDP Final Consumption Expenditure
Calculating the Marginal propensity to consume using regression analysis. We approximate Y using the GDP data and use the data of final household consumption and GDP of past 10 years to approximate C’ and c (marginal propensity to consume) using the regression analysis. Regression Statistics R Square 0.985919 Adjusted R Square 0.984158
Intercept GDP
Coefficients 265094.9916 0.66296168
t Stat Lower 95% Upper 95% 3.826797047 105350.3961 424839.5872 23.66691233 0.59836549 0.72755787
at 95% level of significance we find that the coefficient(c) is significant. Also a high R square suggests that the change in consumption can be explained by the change in income (GDP) C= C’ + cY Final Consumption = 0.66296168*GDP + 265094.99 MPC = 0.66296168
13
Understanding the relationship of GDP of Germany with its Imports of Goods and Services
GDP v/s Imports
GDP Imports of Goods & Services
Calculating the marginal propensity to import using regression analysis: We approximate Y using the GDP data and use the data of final household consumption and GDP of past 10 years to approximate C’ and c (marginal propensity to consume) using the regression analysis. Regression Statistics R Square 0.966704149 Adjusted R Square 0.962542167
Coefficients Intercept GDP -819397.75 0.68479167
t Stat
Lower 95%
Upper 95%
7.374180402 -1075634.31 -563161.199 15.24041255 0.581176862 0.788406478
Imports of Goods & Services = .68479167*GDP – 819397.75 M= M’ + mY M = -8193977.75 + 0.68479167Y MPM = 0.68479167
14
Calculating the tax rate: We use the average of the past ten year tax data to approximate the taxation rate for the economy. For the purpose we take an average of the tax revenue as the percentage of GDP and get t= 35.9131056% t= 0.359131056
CALCULATING THE MULTIPLIERS SIMPLE KEYNESIAN MULTIPLIER Simple Keynesian multiplier = 1/1-c Using the MPC calculated above we get Keynesian multiplier to be 2.967021673 GOVERNMENT MULTIPLIER Formula for govt multiplier= 1/1-c(1-t) Using the values of c and the govt multiplier= 1.73874202 OPEN ECONOMY MULTIPLIER Formula for open economy multiplier = 1/1-c(1-t)+m Using the data calculated earlier: Trade multiplier= 0.793701113
15
MEXICO GDP data in million US$, constant prices (OECD base year)
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
GDP 924933.6 985895.74 985572.11 993180.21 1006988 1047388.1 1081771.1 1136246.8 1175254.7
Final Consumption 695023.9998 746617.0845 760961.2211 771279.4554 787137.564 821414.895 857999.0378 902077.9989 934823.7754 948089.9988
Imports of Goods & Services 243608.0832 295926.6042 291097.9992 295356.2674 297402.2472 329348.4458 357260.565 402171.3297 430310.6631 448788.843
Investment 234537.928 261865.345 251991.407 249102.285 238805.16 244593.499 248464.358 266811.034 279825.132 294702.313
Government Expenditure 102350.6994 104784.1757 102708.6791 102369.8237 103193.8215 100337.3706 102788.1321 104556.1253 106789.1491 107428.0465
Understanding the relationship of GDP of Mexico with its Final Consumption Expenditure Calculating the Marginal propensity to consume using regression analysis. We approximate Y using the GDP data and use the data of final household consumption and GDP of past 10 years to approximate C’ and c (marginal propensity to consume) using the regression analysis. GDP v/s Final Consumption
GDP Final Consumption
Regression Statistics
16
R Square Adjusted R Square
0.992204577 0.991090945
Coefficients Intercept GDP -188499.362 0.961080417
t Stat
Lower 95.0%
Upper 95.0%
5.627925123 -267699.094 -109299.63 29.84900063 0.884944064 1.037216771
at 95% level of significance we find that the coefficient(c) is significant. Also a high R square suggests that the change in consumption can be explained by the change in income (GDP) C= C’ + cY Final Consumption = 0.961080417*GDP -188499.362 MPC = 0.961080417
Understanding the relationship between Mexico’s GDP and its Imports of Goods & Services: Calculating the marginal propensity to import using regression analysis: We approximate Y using the GDP data and use the data of final household consumption and GDP of past 10 years to approximate C’ and c (marginal propensity to consume) using the regression analysis. GDP v/s Imports of Goods & ServicesRegression Statistics R Square Adjusted R Square 0.994894414 0.994165044
Coefficients Intercept GDP -439014.878 0.738293457
t Stat
Lower 95.0%
Upper 95.0%
21.11218987 -488185.771 -389843.985 36.93301013 0.691024452 0.785562461
Imports of Goods & Services = .738293457*GDP – 439014.878 M= M’ + mY
17
MPM = 0.738293457
Calculating the tax rate: We use the average of the past ten year tax data to approximate the taxation rate for the economy. For the purpose we take an average of the tax revenue as the percentage of GDP and get t= .189991
CALCULATING THE MULTIPLIERS SIMPLE KEYNESIAN MULTIPLIER Simple Keynesian multiplier = 1/1-c Using the MPC calculated above we get Keynesian multiplier to be 25.694
GOVERNMENT MULTIPLIER
Formula for govt multiplier= 1/1-c(1-t) Using the values of c and the govt multiplier= 4.514342
OPEN ECONOMY MULTIPLIER Formula for open economy multiplier = 1/1-c(1-t)+m Using the data calculated earlier: Trade multiplier= 1.041873
18
A comparison of developed and developing economies. Developed economies are those economies which have been developed in terms of resources and economic conditions . These include economies from the global north such as Germany, Britain, France, United States of America etc. These are the economies with hisg per capita income ranging from $10000 to $30000. These countries have extensive infrastructure , largely urban population and en educated and skilled labour force. The centre of economic activity in these countries has shifted from industry to services. Developing economies are those economies which are striving to come out of their social, economic and political crisis. The per capita income of these countries ranges from $1000 to $1000.They currently lack what developed economies owe such as political stability, strong economic indicators, free market system, democracy etc. The developing economies include economies of global south or rapidly emerging economies such as India, China, Brazil, Turkey etc. However underdeveloped countries are usually referred to third world countries which are in worse conditions as compared to the developing and developed countries. These economies lack political stability, face military intervention, very high poverty line, greater unemployment, greater default risks and greater economic problems. On comparing Germany with Mexico we not only look at the growth rate and the size of the GDP but also look at the sectoral composition of GDP alongwith other socio economic indicators to bring out the differences in a developed and developing economy.
Comparing Germany and Mexico: ? Comparison of the GDP of Germany and Mexico
GDP Mexico GDP Germany
19
?
Simple Keynesian Multiplier: the multiplier for Mexico is so greater than that of Germany as the consumption rate of a developing economy is high and any investment. Savings rate: the savings rate in Mexico is 10.84% and that of Germany is 7%. Mexico has a higher savings rate than that of Germany. GROWTH RATE OF GDP (%growth rate yoy basis) 2000 2001 2002 2003 0.217 31 2004 2005 2006 2007 2008
? ?
Germany 3.20 9826 Mexico 6.59 0975 1.24 0 0.032 83
1.207 682
0.753 13
3.164 741
2.465 418
1.258 15
0.771 947
1.390 264
4.011 976
3.282 733
5.035 784
3.433 052
As can be seen from the data in the table the growth rate of Mexico has been greater than that of Germany for the past four years. This is because mexico is a smaller economy as compared to Germany and grows off a smaller base giving itself a greater rate of growth. Also it is a developing economy and is at a stage where any development leads to a greater increase in GDP.
?
SECTORAL COMPOSITION OF GDP (percentage contribution of various sectors in GDP)
GERMANY YEAR SECTOR Agricultur e Services 19 99 1.1 78 8 61. 54 2000 2001 2002 2003 2004 2005 2006 2007 2008
1.137 5 61.63 35
1.166 104 62.17 24
1.084 761 62.96 66
1.027 222 63.14 10
1.312 901 62.69 81
1.140 105 63.01 93
1.069 809 62.67 75
1.028 922 63.27 69
1.054 513 75.11
20
20 Industry 21. 91 23
22.56 194
22.52 851
22.21 206
22.35 423
23.11 804
23.27 159
23.77 846
23.61 658
23.36 202
MEXICO YEAR SECTOR Agricultur e 199 9 4.2 634 41 34. 764 64 58. 813 75 2000 2001 2002 2003 2004 2005 2006 2007
4.015 061
4.254 956
4.182 509
4.283 627
4.235 853
4.073 017
4.023 139
4.079 961
Industry
34.58 164
33.36 264
33.10 327
32.63 227
32.51 776
32.36 626
32.55 033
32.26 568
Service
59.36 657
60.33 595
60.97 104
61.60 852
62.01 477
62.63 119
62.86 359
63.24 045
Looking at the sectoral composition of GDP of both Mexico and Germany following inferences can be made 1. Agriculture contributes a greater proportion of GDP in Mexixo than it does in Germany 2. Services form 3-4th of Germany’s GDP. The contribution of Services in GDP of Mexico has also been growing over time 3. Industry has a greater share in GDP of Mexico ? Investment rate (as a % of GDP) 1999 Germ any Mexi co 2000 2001 2002 2003 2004 2005 2006 2007 2008
21.98 21.77 19.82 18.01 072 842 516 388 20.47 21.38 20.18 19.90 177 726 814 559
18.4 18.21 17.79 18.44 18.88 19.69 929 472 949 413 437 658 19.7 20.46 21.28 22.25 23.05 051 246 984 208 658
21
?
SOCIO ECONOMIC INDICATORS GERMANY MEXICO 0.56 18.8 73 US$ 7990
Gini coefficient Infant mortality(per 1000) Life expectancy (in years) PER capita income
0.27 3.9 80 US$ 30400
The high Gini coefficient of Mexico suggests greater inequality in the country in terns of income distribution. Also Mexico has a higher infant mortality rate than Germany. The life expectancy in Germany is higher than that of Mexico. Confirming to the difference between a developed and developing nation, Mexico has a lower per capita income(<10000$) than that of Germany. Following conclusions can be drawn about developed and developing nations from the comparison of Germany and Mexico ? A developing nation generally has higher rate of growth of GDP than that of a developing economy. This is attributable to the comparatively smaller base of the developing economy. ? In case of a developing economy a greater portion of their income comes from agriculture and industry as compared to a developed economy. ? Developing economies have a higher income inequality and poor socio economic indicators like infant mortality rate and life expectancy ? Developing economies have a higher keynesian multiplier. ? Developing countries have a higher savings rate than that of developed countries. ? Developed economies have a higher per capita income than that of developing economies.
22
INDIAN GDP AND ITS TRENDS
INDIA
GDP India
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1952035 2030710 2136650 2217134 2402728 2602065 2844942 3120031 3402716 3644011
Imports of Goods & Services
265702 277710 285444 320535 364824 445870 628983 782976 837015 1070168
Final Consumption
1506387 1551850 1634837 1673357 1763745 1850690 1980383 2102984 2277701 2464977
Government Investment Expenditure
506244 511788 520656 618035 759325 1011212 1272630 1521805 1845513 252744 265088 281786 290978 310297 338052 375562 421546 479099 603318
Understanding the relationship of GDP of INDIA with its Final Consumption Expenditure
GDP India Final Consumption
Calculating the Marginal propensity to consume using regression analysis. We approximate Y using the GDP data and use the data of final household consumption and GDP of past 10 years to approximate C’ and c (marginal propensity to consume) using the regression analysis.
23
Regression Statistics:
R Square Adjusted R Square 0.994903 0.994266
Coefficients Intercept 466959.3512 GDP 0.536459063
t Stat Lower 95% Upper 95% 12.76173416 382581.305 551337.3973 39.51562785 0.505153049 0.567765077
at 95% level of significance we find that the coefficient(c) is significant. Also a high R square suggests that the change in consumption can be explained by the change in income (GDP) C= C’ + cY Final Consumption = 0.536459063 *GDP + 466959.3512 MPC = 0.536459063 Understanding the relationship of GDP of INDIA with its Imports of Goods and Services
GDP India Imports of Goods & Services
Calculating the marginal propensity to import using regression analysis: We approximate Y using the GDP data and use the data of final household consumption and GDP of past 10 years to approximate C’ and c (marginal propensity to consume) using the regression analysis.
24
Regression Statistics R Square Adjusted R Square 0.972436 0.968991 Lower 95% -889632 Upper 95% -540619
Coefficients t Stat
Intercept -715125 GDP 0.471691
-9.44997
16.79992 0.406945 0.536436
2000 GDP at Factor Cost 1 Agriculture, Forestry & Fishing 2 Mining & Quarrying 1786525
2001 1864300
2002 1972605
2003 2048287
2004 2222759
2005
2006
2007 2871120
2388768 2616101
24.99349
23.89117
23.99102 21.43088 21.71522 20.21586 19.53724
18.5055
2.328207
2.28445
2.196841 2.302802 2.187642 2.201595 2.108634
2.0911
3 Manufacturing 14.78362 4 Electricity, Gas & Water Supply 5 Construction 6 Trade, Hotels & Restaurants 7 Financing, Insurance, Real Estate & Business Services
15.26423
14.79277 15.21686 14.95272 15.11721 15.05454 15.33175
2.492324 5.7098
2.437322 5.812477
2.3435 2.364073 2.282524 2.291767 2.198424 2.108724 5.712852 5.939109 6.1286 6.623163 7.028322 7.158983
21.69094
22.29518
23.0075 24.24914
25.0306 25.78103 26.39038 27.12865
13.07286
13.03696
13.2179 13.74563 13.37302 13.52496 13.75666 14.26175
25
8 Community, Social & Personal Services Gross Capital Formation (% of GDP) Growth Rate
14.92881 28.3368
14.97822 26.21134
14.73762
14.7515 14.32967 14.24441
13.9258 13.41351
24.0519 27.04914 29.30349 33.21984 36.25548 37.39945
-
4.353424
5.809419 3.836653 8.517947 7.468601 9.516747
-
Imports of Goods & Services = .471691*GDP – 715125.75 M= M’ + mY MPM = .471691 GDP data in Rs crore Sorce:indiastat
India has been growing at 2nd greatest rate next to China at 9%.. The investment rate has also increased to 39.34043 percent. The savings rate in India is 34.8%.
COMPARING INDIA WITH GERMANY As can be seen from the data the growth rate of Indian GDP is higher than that of Germany. India also has a higher value of the simple Keynesian multiplier that explains the higher rate of growth in the country. India derives around 20 % of its GDp from agriculture as against 1.8% incase of Germany. However the share of income from services is witnessing a sharp increase in case of India. India has had a peculiar growth path as compared to other developing economies. Unlike other developing economies India saw a sudden jump from agriculture to services rather than moving to industry first as has been the case with other developing economies across the globe. The investment rate of India is quite similar to that of Germany. Coming to the social parameters: india has a lower life expectancy, greater inequality nad infant mortality and a lower per capita income as compared to that of Germany. Everything combined leads to a conclusion that India is a developing country and confirms to the differences that persist between a developed and a developing nation.
26
SOCIO ECONOMIC INDICATORS GERMANY Gini coefficient Infant mortality(per 1000) Life expectancy (in years) PER capita income 0.27 3.9 80 US$ 30400 INDIA 0.34 55 64.8 US$ 700 (approx)
COMPARISION OF INDIA AND GERMANY ON BASIS OF FISCAL POLICY Fiscal Policy can be defined as Government revenue and expenditure policy which is implemented by altering taxes and/or government spending. This differs from Monetary Policy which is carried out by the Central Bank and relates to money supply and interest rates. Here we will be comparing fiscal policies of India, Germany and Belgium. Fiscal Policy of India The Union Budget 2008-09 was presented in the backdrop of impressive growth in the Indian economy which clocked about 9 per cent of average growth in the last four years. This striking performance coupled with significant improvement in fiscal indicators, during the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 regime definitely put the country on a higher growth trajectory inspiring confidence in the medium to long term prospects of the economy. The process of fiscal consolidation during these years has resulted in improvement in fiscal deficit from 5.9 per cent of GDP in 2002-03 to 2.7 per cent of GDP in 2007-08. During the same period, revenue deficit has declined from 4.4 per cent to 1.1 per cent of GDP.
27
FISCAL INDICATORS – ROLLING TARGETS AS PERCENTAGE OF GDP (at current market prices) Revised Budget Targets for Estimates Estimates 2007-08 2008-09 2009-10 2010-11 1. Revenue Deficit 1.4 1.0 0.0 0.0 2. Fiscal Deficit 3.1 2.5 3.0 3.0 3. Gross Tax Revenue 12.5 13.0 13.5 14.0 4. Total outstanding liabilities 63.8 59.6 55.7 52.3 at the end of the year Source: www.indiabudget.nic.in Headline inflation fell to 4.39 per cent in January, 2009. However, the fiscal measures undertaken through tax concessions and increased expenditure on food, fertilizer and petroleum subsidies along with increased wage bill for implementing the Sixth Central Pay Commission recommendations significantly altered the deficit position of the Government. Important points: ? ? ? The estimates for gross tax revenue which stand reduced from Rs 6,87,715 crore in B.E.2008-09 to Rs 6,27,949 crore in R.E.2008-09. Tax to GDP ratio increased from 8.8 per cent in 2002-03 to 12.5 per cent in 2007-08. Additional budgetary resources of Rs.1,50,320 crore provided as part of stimulus package and various committed liabilities of Government including rising subsidy requirement, provision under NREGS, implementation of Central Sixth Pay Commission recommendations and Agriculture Debt Waiver and Debt Relief Scheme for Farmers contributed to the higher fiscal deficit of 6 per cent of GDP in RE 2008-09 as compared to 2.5 per cent of GDP in B.E.2008-09. The Government increased public expenditure, even with reduced receipts, to stimulate economy by creating demand and maintain the growth trajectory which the country was witnessing in the recent past. The stock of contingent liabilities in the form of guarantees given by the government has reduced from Rs 1,07,957 crore at the beginning of the FRBM Act regime i.e. 2004-05 to Rs 1,04,872 crore at the end of 2007-08. As a percentage of GDP, it has reduced from 3.4 per cent in 2004-05 to 2.3 per cent in year 2006-07 and further to 2.2 per cent for the year 2007-08.
? ?
Revenues: ? The Gross Tax Revenue, States share and net Tax Revenue of Centre in BE 2008-09 are placed at Rs.6,87,715 crore, Rs.1,78,765 crore, and Rs.5,07,150 crore respectively, representing growth rates of 25.5 per cent, 25.5 per cent and 25.6 per cent over BE 2007-08
28
? ? ?
Direct taxes which were 43 percent of gross tax revenue in 2004-05 have gone up by 53 percent in BE 2008-09 The non-tax revenue (NTR) increased from Rs. 82,550 crore in BE 2007-08 to Rs. 95,785 crore in BE 2008-09 registering a growth of 16.0 per cent NTR which constituted 1.8 per cent of GDP in BE 2007-08, is estimated to decline to 2.0 per cent of GDP in BE 2008-09
Expenditure ? ? ? ? ? Plan Revenue expenditure is estimated to increase from Rs.1,74,354 crore in BE 2007-08 to Rs.2,09,767 crore in BE 2008-09, an increase of 20.3 per cent Non-Plan revenue expenditure is budgeted to increase from Rs.3,83,546 crore in BE 2007-08 to Rs.4,48,352 crore in BE 2008-09, an increase of modest 16.9 per cent The interest payment expenditure is projected to increase from Rs.1,58,995 crore in BE 2007-08 to Rs.1,90,807 crore in BE 2008-09, showing an increase of 20.0 per cent Total Defence Services expenditure is budgeted to increase from Rs.96,000 crore in BE 2007-08 to Rs.1,05,600 crore in BE 2008-09 The allocation for major subsidies, i.e. food, fertilizers and petroleum products is estimated to be Rs.66,537 crore in BE 2008-09 as against Rs.50,987 crore in BE 200708. The Non-Plan Grants to States/UTs in 2008-09 are placed at Rs.43,294 crore, as against Rs.38,403 crore in BE 2007-08, signifying an increase of 12.7 percent
?
Tax Policy Custom Duties ?
?
To curb the inflationary trends in the economy arising out of a rise in prices of food items, a sharp reduction was effected in the import duty rates on various food items such as semi-milled or wholly milled rice (70% to nil) and crude and refined edible oils (from 40%-75% to 20%-27.5%). On 01.04.2008, a further reduction was effected in the import duty rate- on all crude edible oils duty was reduced to nil, and on refined edible oils duty was reduced to 7.5%. Import duties on crude petroleum was reduced to nil and on petrol and diesel to 2.5% (earlier 7.5%). Customs duty on other petroleum products was reduced from 10% to 5%
29
Service Tax ? The upper limit of refund of service tax paid by exporters on foreign commission agent services has been enhanced from 2% of FOB value to 10% of FOB value of export goods.
Direct Taxes ? Distortions within the tax structure have been minimised by expanding the tax base and maintaining moderate tax rates.
Government Borrowings, Lending and Investments ? The gross and net market borrowings (dated securities and 364- day Treasury Bills) of the Central Government during 2008-09 (up to February 9, 2009) amounted to Rs 2,40,167 crore and Rs 1,68,710 crore, respectively. As part of policy to elongate maturity profile, Central Government has been issuing securities with maximum 30-year maturity. The weighted average maturity of dated securities issued during 2008-09 (up to February 9, 2009) was 14.45 years which was marginally lower than 14.90 years during the corresponding period of the previous year. The weighted average yield of dated securities issued during 2008-09 (up to February 9, 2009) was 7.91 per cent and was lower than 8.12 per cent during the corresponding period of last year.
?
30
Fiscal Policy of Germany Fiscal Indicators Estimated 2009 Provisional outturn1 January to September 2009 218.6 0.8 188.0 -2.2 164.5 -3.9 -30.6 -11.2 -0.2 -19.2
Expenditure (€ bn) Change on year in % Revenue (€ bn) Change on year in % Tax revenue (€ bn Change on year in % Financial deficit (€ bn) Cash shortfall (€ bn) Adjusted for revenue from coin (€ bn) Net borrowing/current financial market balance (€ bn)
303.3 7.4 253.8 -6.2 224.1 -6.3 -49.5 -0.4 -49.1
The new constitutional fiscal in Germany rule limits the structural deficit of the Federation at 0.35 percent of GDP and requires structurally balanced budgets for the regions (Lander). Some important trends: ? Federal expenditure up to and including September amounted to € 218.6 bn, which was € 1.8 bn (+ 0.8 %) more than last year and the spending change was +3.3% ? The Federation’s ? Interest expenditure was € 2.7 bn below the previous year's level. ? The Federation’s revenue, at € 188.0 bn, was€ 4.2 bn below the result through September2008. ? Tax receipts declined by – 3.9 % compared to the previous year ? Administrative receipts were up by + 11.3 % compared to the corresponding period in the previous year. ? The financial deficit was – € 30.6 bn, a slight increase over the previous month’s figure. ? Via investment and redemption fund , the Federation has made a total of € 20.4 bn available through 2011 for additional fast-acting economic stimulus measures.
31
Tax Policy ? ? ? ? ? Unemployment payroll taxes reduced from 6 ½ to 4 ½ percent Tax rates for an individual are 14% - 45% Municipal trade tax of 14%-17% Corporate tax is 15% Effective corporate tax rate, including trade tax and solidarity tax is about 30%-33%
32
Source: Ministry of Finance, Germany www.bundesfinanzministerium.de
33
Source: Ministry of Finance, Germany www.bundesfinanzministerium.de Tax Revenue ? ? ? ? Total tax revenue (excluding local authority taxes) declined in September 2009 by – 7.4 % on the year Revenue from joint taxes was – 8.4 % in total below last year’s level. The cumulative decline in tax revenue for the months January to September 2009 amounts to – 6.0 % in total and – 3.8 % for the Federation. Receipts from the corporation tax, fell sharply (– 52.4 %) for Sept 2009.
Source: Ministry of Finance, Germany www.bundesfinanzministerium.de
34
Fiscal Policy of Mexico Fiscal policy has been prudently guided by a framework aiming at balanced budgets and saving part of oil revenues in a stabilization fund. The framework has contributed to securing long-term sustainability and improved policy credibility. The fiscal stimulus measures in the 2009 budget and the January 2009 package to stimulate demand, which account for 1.6% of GDP. Budget revenues are projected to fall in 2010, reflecting the depressing effect of low world energy prices on oil revenue and the negative influence of the downswing on non-oil tax revenue. While oil revenue has been protected in 2009 by a hedge on oil export prices, this advantage will disappear in 2010. It is projected that the government deficit (in terms of net lending or public sector net borrowing requirement) will increase from some 3-4% of GDP in 2009 to about 5% of GDP in 2010, assuming no corrective measures to cut expenditure or raise taxes. Mexico would be able to cover this level of borrowing, including by drawing down oil stabilization funds that were accumulated during the past period of high energy prices. To help meet external financing requirements, the government has secured large sources of foreign lending from the capital market, multilateral agencies and the US Federal Reserve. Revenue (as of 2007): ? ? ? ? ? Budgetary revenues equaled 25.5 percent of GDP (2,485.6 thousand million pesos) oil revenues accounted for 35.4 percent of budgetary revenues, while the remaining 64.6 percent was made up of non-oil revenues Non-oil tax revenues rose 8.1 percent in real terms, due mainly to a 13.1 percent increase in income tax collection Revenues from the VAT rose 3.4 percent in real terms Non-oil non-tax revenues totaled 160 thousand million pesos (1.6 percent of GDP), which represented real growth of 82.1 percent
35
http://www.banxico.org.mx Expenditure ? ? Budgetary expenditures accounted for 25.4 percent of GDP (2,483.0 thousand million pesos). Public expenditure grew 5.9 percent in real terms compared to 2006 due to an increase in programmable expenditures (10.0 percent at constant prices), particularly on capital expenditures. current expenditure rose 7.3 percent at constant prices capital expenditure grew at a real annual rate of 20.5 percent and accounted for 4.3 percent of GDP non-programmable expenditure declined 5.5 percent at constant prices federalized expenditures (total federal resources channeled to state and municipal governments) exhibited a slightly growth of 1.2 percent in real terms
? ? ? ?
36
http://www.banxico.org.mx Tax Policy ? ? Corporate income tax is 34.0% Royalties, license fees or other compensation paid by a Mexican licensee to a nonresident for unpatented technology of trademarks are subject to a withholding tax at a rate of 35% Interest payments to nonresidents are subject to withholding tax rates of 15%, 21% or 4.9% or 10% for residents of a tax treaty partner, and 35%, depending on the type of payee The tax on sale of share is 20% of the gross proceeds from sale. VAT is imposed to the whole country with rate as 15% of the value of product or service. Imports are subject to VAT at a rate of 10%, assessed on the customs value of the import plus the import duty
?
? ? ?
37
Comparison of Fiscal Policies between Germany and India Fiscal Deficit: As we can see that the % fiscal deficit for Germany is much less than India as a % of GDP Fiscal Deficit as % of GDP India Germany 2.5 0.121524
Revenue as a % of GDP Revenue as a % of GDP India 24.3
38
Germany
43
Tax Revenue as a % of GDP: The below table shows that Germany gets around 31.7 % of the revenure from its taxes whereas India gets only about 20.6%. Tax Revenue as a % of GDP India Germany 20.6 31.7
39
Expenditure as a % of GDP: The below chart clearly shows that the expenditure of Germany as a % of its GDP is much higher than that of India. Expenditure as a % of GDP India 23.4 Germany 43
Interest Expenditure as a % of Total Expenditure: When we compare the % of expenditure in Interest, the below chart shows that India has a much bigger % than Germany in this regard. Interest Expenditure as a % of Total Expenditure India 20.6 Germany 15
On comparision of the fiscal policy of India and Germany, following points become evident: ? ? ? Germany like other advanced nations hasa lower fiscal defecit India has a lower tax generation implying inefficient tax policy and a less buoyant tax system Also expenditure as a % og GDp in India are less as compared to germany implying that a major portion of India’s revenues goes for the payment of debts and interest.
40
41
References: http://www.economia-snci.gob.mx http://www.oecd.org http://www.banxico.org.mx http://www.imf.org http://www.foropoliticaspublicas.org.mx www.bundesfinanzministerium.de http://www.forbes.com/ http://indiabudget.nic.in Wikipedia.org Oecd statistic Indiastat
42
doc_159003602.docx