Summary notes on The Economy, Business Environment and Globalisation. Topic areas include GDP, Fiscal Policy, Monetary Policy, Inflation, and Globalisation & Protectionism.
THE ECONOMY, BUSINESS ENVIRONMENT AND GLOBALISATION
Gross Domestic Product (GDP)
• It is a measure of productivity of an economy. From that productivity, we can derive the size
and health of the economy.
• GDP = Consumption [C] + Private investment [I] + Government spending [G] + Net Exports.
• These four things added up speak to the productivity of a country.
• One of the focal points of the GDP equation is the [C], i.e., what we do with our disposable
income.
Who conceived the concept of GDP?
• Simon Kuznets in 1937
• The United States of America had just gone through the Great Depression and Kuznets wanted
to ensure that that never happened again. Therefore, wanted a way to measure the economy
so that safeguards could be put in place to prevent something like the Great Depression ever
happening again. Simply put, it was to measure the wealth of a nation, see if it’s falling apart,
and implement measures which could be monetary or fiscal policy to protect the nation.
Uses of GDP
• In terms of what GDP means, it indicates the size of the economy and how it is performing, it
also indicates the demand available within the economy for goods and services.
• Consumption is about supply and demand. Through the consumption figure, we are
measuring the demand in an economy of good and services.
• Indirectly, GDP is a measure of a country’s level of employment because the idea that there is
a greater level of demand through consumption, there is more people in employment to offset
demand.
• It is also an indirect measure of money that people have. The more money that you have, the
more that you’ll consume. If that number goes up, it could speak to an increased level of
money or disposable income.
• When the GDP is higher than previous GDP figures, it may be said that there are more jobs
and there is a greater level of production – typically it is a greater level of consumption, and
to meet their consumption, there has to be a greater level of production.
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, THE ECONOMY, BUSINESS ENVIRONMENT AND GLOBALISATION
• GDP enables a means by which growth and changes can be measured by giving us a figure we
can compare period on period, typically year on year.
Limitations of GDP
GDP has its fair share of problems.
• GDP does not reflect and capture that goods and services have different values in different
countries.
GDP does not reflect and capture that goods and services have different values in different countries.
Therefore, it is a poor sum of total of the productivity of an economy as ultimately it can’t be used on
an international scale to compare economies. PPP comes in by adjusting the GDP figure by reference
to the exchange rate calculation which gives us a figure that can be used as a comparison on the
international basis where goods and services cost different amounts.
GDP is often ineffectual when comparing GDP of different countries where the value of goods and
services differ. For instance, in China, getting a haircut is going to considerably cheaper than getting a
haircut in the UK. What that would mean for the UK GDP figure is that their GDP figure goes up more
than China’s does in respect of these haircuts because theirs costs more but China is no less productive
in providing a haircut as it is not just money that GDP is trying to capture – it is trying to capture
productivity as a whole.
There is a way to try and balance this equation so that GDP figures can be relatively compared to one
another. It is through converting the GDP figure to a standard currency. Through that currency
exchange thereby getting a standard figure that should in theory one to compare on the international
basis GDP without the difficulty of goods and services costing different amounts in different countries.
The means by which this can be done is Purchasing Power Parity (PPP).
As the name suggests, we try to give parity equivalence in respect of purchasing power. It is a way of
levelling the playing field of GDP, so it becomes an internationally comparable figure despite the fact
that goods and services have different values in different countries.
• Sustainability
a. Sustainability of natural resources –
The GDP figure of the Middle East historically has shown a strong economy. But the fact that
Mohammed Bin Salman, the king of Saudi Arabia is redirecting investment strategy to sustainable
investment strategy as oil is running out, is not reflected in the GDP figure. The GDP figure may be
lower than other years because it does not show that ultimately, the economy has moved to a more
sustainable method of production because it has moved out of oil money into other forms of
commerce.
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