Factors affecting the economic performance of a country

Economic performance of a country is measured by economic growth and the most commonly used indicator for economic growth of a country, its Gross Domestic Product (GDP) or Gross National Product (GNP). GDP is the aggregate value of all final goods and services produced in the domestic territory of an economy or a country in a certain period of time. GNP is GDP adjusted for domestic workforce working abroad and the foreign workforce working in the domestic economy. Although economic growth alone is not a sufficient condition for economic development, it is a necessary condition for an economy to be healthy and performing well.

When an economy grows, it affects many other macroeconomic indicators such as per capita income, employment, exports, total factor productivity, rate of inflation among others. This article highlights the role of some of these factors in the economic performance of a country.

Gross domestic product (GDP)

GDP consists of goods and services that a country produces and ready for sale in the market including production of non-market services of the government such as defense and education (Callen, 2008). Since it is the measurement of output, an increase in GDP signifies a rise in the level of production. Economists mainly take into consideration the rate of growth of GDP over time and GDP per capita rather than absolute values of GDP. The growth rate is important because it indicates whether a country or economy is growing or not, relative to the previous time period (quarter, year).

GDP per capita is important because it takes into account population and is a broad indicator of not just economic growth, but also the standard of living. The figure below suggests that historically, rate of growth of GDP in USA was higher than that in India. 1991 onwards, the trend has been the opposite largely due to opening up of Indian economy and economic liberalization. In 2016, GDP of USA was 8 times of India’s. However, a higher GDP growth rate in India is suggestive of growing economic performance and justifies its place among one of the leading developing nations.

Figure 1: Historical annual growth rates of India, Pakistan and USA (Source: Intelligenteconomist, 2018)

Figure 1: Historical annual growth rates of India, Pakistan and USA (Source: Intelligenteconomist, 2018)

GDP includes consumer expenditure, investment in business and inventories, government spending, foreign spending on exports and domestic spending on imports. A change in any of these components would change the level of GDP.

Employment is an indicator of economic performance

Another major indicator of economic performance of a country is its rate of employment (Klasen & Lamanna, 2009). Labor force that is searching for a job but without one is called unemployed. An increase in the rate of employment indicates an improvement in the standard of living. Therefore employment is also an indicator of economic development.

Figure 2: Phillips Curve showing the inverse relationship between the level of unemployment and the rate of inflation (Salame, 2008) as an indicator for economic performance

Figure 2: Phillips Curve showing the inverse relationship between the level of unemployment and the rate of inflation (Salame, 2008)

As a result of allocation of resources, mobility of labor between industries and labor force leaving their current jobs voluntarily, an economy structurally always consists of some level of unemployment. In economic terminology, this is ‘natural rate of unemployment’. This natural rate determines the rate of change of price or the rate of inflation in an economy. “Phillips Curve” typically presents the relationship between unemployment and inflation (Salame, 2008). The implication is therefore that high level of employment is only possible at the cost of high inflation in the economy. This theory however, fails to provide a justification when an economy experiences both high level of unemployment and high inflation rate, like in situations of “stagflation.” The figure below shows the Phillips Curve.

Rate of inflation as an indicator of economic performance

The inflation rate is a significant indicator of the economic performance from the standpoint of security markets. It determines the real rate of return on investments given the growth rate of the same (Graham, 2018). From the supply demand standpoint, it is the gap between the two. An increase in demand and a limited supply both push the price level higher. A high rate of inflation in an economy reduces the purchasing power, decreases disposable income and causes a fall in company profits by increasing its costs. Therefore, a low inflation rate is better than high inflation rate.

Inflation is published as Consumer Price Index (CPI) which measures the increase in price of a specified basket of goods that the consumers spend on an average over the year (Statista, 2018). Data indicates that inflation rate since 2010 experienced a steady decline compared to previous years with a value of 3.8% in 2017, which was slightly higher than global inflation rate of 3.15%.

Year Global Inflation Rate
2012 4.08%
2013 3.66%
2014 3.23%
2015 2.79%
2016 2.8%
2017 3.15%

Table 1: Global Inflation rate from 2012 -2017. Source: (statista, 2018)

Exports

Exports are a part of GDP which determines the demand for domestically produced goods and services outside the country. It is a part of GDP and therefore an increase in exports of a country enhances its GDP level. It is thus an important indicator of economic performance. Economic literature represents reliance on exports and its contribution in economic growth as ‘export led growth’.

Since the mid-1970s, export oriented growth strategies were mainly adopted by developing countries to achieve better allocation of resources, development of technologies, economies of scale and increase employment (Shirazi & Abdul Manap, 2005). The success of East Asian Tigers in the 1990’s and the experience of Asian economies including China and Japan strengthened the economic argument of pro export promotion policies. The formation of free trade agreements such as NAFTA and SAFTA prove the growing use of export orientation globally.

Other indicators of economic performance

The factors indicating economic performance of a country mainly implies whether the country is growing by producing more output. But economic growth alone does not guarantee economic development. Growth does not take into account environmental costs associated with increased economic activities and income inequality in the labor force. This gives rise to the issue of sustainable development and social indicators like mortality rate, poverty, human development index (HDI). This indicates whether in economy is fulfilling the needs of the present without compromising the needs for the future.

References

  • Callen, T. (2008). What is gross domestic product? Finance and Development, 45(4), 48–49. https://doi.org/ISSN 0015-1947.
  • intelligenteconomist. (2018). What is Economic Growth?.
  • Klasen, S., & Lamanna, F. (2009). The impact of gender inequality in education and employment on economic growth: New evidence for a panel of countries. Feminist Economics, 15(3), 91–132. https://doi.org/10.1080/13545700902893106.
  • Salame, S. (2008). The Phillips Curve and the Purchasing Power Parity: The Case of Lebanon. Beirut: American University of Beirut.
  • Shirazi, N. S., & Abdul Manap, T. A. (2005). Export-led growth hypothesis: Further econometric evidence from South Asia. Developing Economies, 43(4), 472–488. https://doi.org/10.1111/j.1746-1049.2005.tb00955.x
  • Statista. (2018). Inflation rate in India 2010-2022.
Saptarshi Basu Roy Choudhury

Saptarshi Basu Roy Choudhury

Senior Research Analyst at Project Guru
Saptarshi has done his M. Phil in International Trade and Development and Masters in Economics from Jawaharlal Nehru University, New Delhi. His academic interests include issues related to economics of climate change, regulation and contemporary trade theories. He has a keen interest in current affairs and likes to read and travel in his spare time.
Saptarshi Basu Roy Choudhury

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