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COURSE: GSFM7223 – ECONOMICS FOR MANAGERS SECTION: MC-O11 LECTURER: DR. SARINA BINTI MOHAMAD NOR GROUP: LST

TEAM SMITH Forum 2 Issue:  Dead Rats Can Raise GDP, Economists Have Lowered It (Part 1)  What Increase GDP?

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What increase GDP? Economic growth can be considered a main factor in the well-being and prosperity of billions of people.  Economic growth measured by GDP means the increase of the growth rate of GDP, but how to determines the increase of each component is very different.   The  causes of economic growth  can be summarized in  three factors categories:

Increase in the expenditure of household, businesses and Government

Improvement in knowledge and skills that make a worker productive

Increases in Quantity & Quality of natural resources Increases in Quantity & Quality of human resources Increases in Capital Expenditure Improvements in Technology

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DEFINITION G ross  D omestic  P roduct  (GDP) The market value of all final goods and services produced in a country during a certain period.  If your GDP contribution on this year is high, this reflects that you are living well.

Food Cost  (Product) Delivery Charges  (Service) RM20.00 RM5.00 Both counted as part of GDP         Food delivery

Car Cost  (1st Hand) RM 2 Million Sell the car to next buyer (2nd Hand) RM 1.5 Million        Car Purchase

The RM 2 million cost is part of the GDP, but you sold it to your brother at the end of the year for RM 1.5 million. This RM 1.5 million is not part of the GDP, because it is only one. A car should not be counted twice.

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GDP = Consumption + Government Expenditures + Investments + Net Profits

GDP = Total National Income + Sales Taxes  +  Depreciation + Net Foreign Income

Tracks the health of a country's economy. Represents the value of all goods and services produced over a specific time period within a country's borders. To determine whether an economy is growing or experiencing a recession. Use to make investments decision.

Is the measurement of a country’s economy at the current moment in time.

Real GDP is considered the most accurate portrayal of a country’s economy and economic growth rate

Calculation of a country’s economy under ideal conditions

GDP = Sum of the value added to products during the production process

Underground Economy Refers to cash and barter transactions that are not formally recorded  Environmental Abuse Many developing economies rely on high output to support the growth of their own economies  Increase in Product Quality As technology advances, producers are able to offer increasingly better products for the same amount of money Non-Market Production Refers to goods and services that are produced for private consumption,   and for which exist no official record of production .

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Per capita primarily used with GDP to find measurements such as GDP per capita, real GDP per capita, GDP(PPP) per capita and Gross National Income(GNI) Per capita means ‘by head’ or ‘per person’, GDP per person, calculated by dividing GDP by population Per capita is a measurement that helps compare GDP figures by accounting differences in population Per capita helps economist compare the size of two nations accurately

Advantages of per capita: Positive correlation with key indicators Compare countries Helps businesses with decision making Widely available statistics

Limitations of per capita: Age difference Distribution of income Doesn’t consider the cost of living

Example:  GDP of India is $2.72 trillion and US is $21.43 trillion. Population of India is 1.36 trillion, while US is only 328 million. GDP per capita in India is $2,000 while in US is $65,335.

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Malaysia is one of the most open economies in the world with a trade to GDP ratio averaging over 130% since 2010. The World Bank's Human Capital Index ranks Malaysia 55th out of 157 countries. Malaysia GDP measured: Based on the  production approach  which is the total difference between the gross output value of the resident unit of production and the value of intermediate consumption plus import duties.   Based on  expenditure approach  is the summation of Private Final Consumption, Government Final Consumption, Gross Fixed Capital Formation, Changes in Inventories and Valuables, Exports of goods & services minus Imports of goods & services.  Based on  income approach  is the summation of all incomes accruing the production in economy. The income components are Compensation of Employees (i.e. salaries & wages), Gross Operating Surplus (i.e. operating surplus & mixed income) and Taxes less Subsidies on Production and Imports.

What happened to Malaysia GDP during the COVID-19 Outbreak

Chart, bar chart

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The COVID-19 outbreak, has changed the economic landscape in terms  of production level, household spending, investment and labor market, and this was caused  Malaysia's GDP decreased at a slower pace of 2.7 per cent from the double-digit decline 17.1 per cent in the second quarter of 2020.  Government imposed a Movement Control Order (MCO) starting 18 March and extended to 12 May 2020 the lockdown is turning into an economic knockout.

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Government policy that attempts to influence the direction of economy through changes in government spending or taxes

GDP —the value of all final goods and services produced in the economy.  C -private consumption  I -private investment  G -purchases of goods and services by the government  NX -exports minus imports (net exports).  Right side are the sources of aggregate spending or demand

This makes it evident that governments affect economic activity (GDP), controlling G directly and influencing C, I, and NX indirectly, through changes in taxes, transfers, and spending.  Fiscal policy that increases aggregate demand directly through an increase in government spending is typically called expansionary or “loose.” By contrast, fiscal policy is often considered contractionary or “tight” if it reduces demand via lower spending. Besides providing goods and services like public safety, highways, or primary education, fiscal policy objectives vary. In the short term, governments may focus on macroeconomic stabilization—for example, increase the expenditure or cutting taxes to stimulate an ailing economy, or slashing spending or raising taxes to combat rising inflation or to help reduce external vulnerabilities.

1. Taxation:   Funds from direct and indirect taxes, capital gain from investment. Taxes affect the consumer's income and changes in consumption lead to changes in real gross domestic product(GDP) 2. Government spending:  Includes welfare programmes, government salaries, subsidies infrastructure. Government spending has power to raise or lower the real GDP figure

Neutral fiscal policy Usually when economy is equilibrium Government spending is fully funded by tax revenue Has neutral effect on the level of economic activity Expansionary fiscal policy Government spends more money than it collects through taxes used during recessions to build a foundation for strong economic Growth and nudge the economy toward full employment Government lowering taxes and spending more to ensure consumers purchasing power does not weak Contractionary fiscal policy Government collects more money through taxes than it spends It works best in times economics booms Slows the pace of strong economic growth in case on high inflation with raises taxes and cuts spending

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Malaysia Environmental Protection Expenditure

2013 RM 2,236.7  -3.6% 2014 RM 2,243.6 0.3% 2015 RM 2,551.3 13.7% 2017 RM 2,592.6 0.8% 2018 RM 2,695.7 4.0%

The GDP are not only contributed by the mining of the natural resources but also the recovery of the damaged done from the activities.

Mining sector contributed 8.4% of total Malaysia GDP in 2017

Environmental issues – Pollution, Deforestation or endangered species

National expenditure of EU member States  - €297 billion in 2018

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Final Services Intermediate Services Government Wholesale and retail trade Finance and insurances Government services Food & beverages and accommodation Real estate and business services Utilities Information and communication  Other services Transport and storage

% Service sector contribution to Malaysia’s GDP

Year Agriculture Industry Services 2019 7.28% 37.42% 54.17% 2018 7.54% 38.3% 52.96%

Records from Departments of Statistics Malaysia

Pay more attention to the farmers and also agribusiness  and not limiting the country by relying their GDP on the Service Sector

“one of the factor that contribute to the many Asian countries economic growth is determined by the growth of it service sector” Park, D., & Shin, K. (2012). The service sector in Asia: is it an engine of growth?. Asian Development Bank Economics Working Paper Series, (322).

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In summary there are many variable factors that could increase a GDP Government fiscal policy and FDI Literacy and widespread education Capital Expenditure Expenditure on environmental protection Strong property rights Efficient Financial institutions

From the “dead rat” story, our team agreed that the GDP increase. It is true that the unproductive (i.e. the dead rat) and actual money which has been counted twice (i.e. the $10K) is recognized in the GDP as it is the weaknesses of using the GDP as a country’s economic wealth indicator. Despite many issues surrounding the GDP, it is still a reliable tool to measure the economic growth for a nation and still being used by many countries.

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“Economics is everywhere, and understanding economics can help you make better decisions and lead a happier life.”

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