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Lessons in macroeconomics - I - Views on News from Equitymaster
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  • Jul 18, 2008

    Lessons in macroeconomics - I

    Have you ever wondered why the standard of living of people in America is better than that in Asia? Also, why standard of living of people in Asia is better than that in Africa? The answer lies in the fact that people in America produce more number of goods and services than that of people in Asia and people in Asia produce more number of goods and services than people in Africa.

    What does the level of goods and services produced in the country signifies?

    It tells us how better off people in one region are as compared to the other region. It gives us a tool to measure the economic well-being. Now you must be thinking what is this tool?

    This tool is nothing but gross domestic product or as is known more popularly, GDP.

    The GDP of a country is defined as the market value of all the final goods and services produced within a country in a given period of time.

    GDP can further be divided into three components, namely goods produced from agriculture and allied activities, goods produced from manufacturing activities and output from services.

    Country Nominal GDP (US $bn)
    USA 13,811
    Japan 4,377
    Germany 3,297
    China 3,280
    United Kingdom 2,728
    India 1,171

    source: World Bank, 2007

    As seen from the above table, United States produces 12 times more goods and services than India and accounts for 25% of the world GDP. India accounts for only 2% of the world GDP currently.

    If one were to assume that the Indian GDP keeps growing at 8% consistently for many years and the US GDP continued to grow at 3%, then it will take a huge 53 years for India to go past the US juggernaut. However, if one were to revise upwards the Indian GDP growth rate to say 10% and keep the US GDP growth rate unchanged, then the target could be achieve in a relatively shorter but still a significant 38 years.

    Is the GDP growth of the magnitude that India is targeting sustainable? If one were to look at its other Asian peers, then it can be inferred that countries can grow their GDP at about 9%-10% consistently for about 2-3 decades. For e.g. Japan grew its GDP at 10% consistently from the 1950s until the 1970s. China on the other hand is believed to have grown at 9% on a consistent basis since 1978. Even South Korea has managed to grow its GDP ten fold in 40 years. Hence, going by these examples, there isn't any reason why any other poor nation in general and India in particular cannot achieve a similar feat.

    We will continue our discussion on macroeconomics and the Indian GDP in the next article.



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