Introduction
Ghana in 2011 experienced a phenomenal record-breaking GDP growth of 13.4%, making it one of the fastest growing economies in the world (worldfolio, 2014). However, the country has not lived up to the hype it has been given over the past decade. The country has experienced a series of demonstrations on economic hardship amongst the populace. One question on the lips of analyst is ‘how did this stable country seen as the bright torch of Africa in terms of economic growth and development plunge into a state of economic hardship, or is it a case of bad governance or bad consumption habit of citizens?’.
Components of Gross Domestic Product (GDP)
Economic growth is the increase in the market value of the goods and services produced by an economy over time (Dwivedi, 2010). It is calculated from the Gross Domestic Product (GDP) of a country. GDP is defined as the value of a country’s overall output of goods and services (typically during one fiscal year) at market prices, excluding net income from abroad (Black, et al., 2009). GDP can be estimated in three ways which (in theory) yields identical figures:
(1) Expenditure basis: Which refers to the amount of money that was spent during the fiscal year.
(2) Output basis: Which refers to the amount of goods and services that were sold during the fiscal year.
(3) Income basis: Which refers to the amount of much income (profit) that was earned during the fiscal year.
Based on the expenditure approach to measuring GDP,
GDP= G+C+I+ (X-M)
Where, G= Government Expenditure, C= Consumption Expenditure, I= Investment Expenditure, X= Exports, M=Imports
Government expenditure
Policymakers are divided as to whether government expansion helps or hinders economic growth. Advocates of bigger government argue that government programmes provide valuable “public goods” such as education and infrastructure. They also claim that increases in government spending can bolster economic growth by putting money into people’s pockets.
Proponents of smaller government have the opposite view. They explain that government is too big and that higher spending undermines economic growth by transferring additional resources from the productive sector of the economy to government, which uses them less efficiently. They also warn that an expanding public sector complicates efforts to implement pro-growth policies such as fundamental tax reform and personal retirement accounts- because critics can use the existence of budget deficits as a reason to oppose policies that would strengthen the economy. Also,by increasing or decreasing taxes, the government affects households’ level of disposable income (after-tax income). A tax increase will decrease disposable income, because it takes money out of households. A tax decrease will increase disposable income, because it leaves households with more money. Disposable income is the main factor driving consumer demand, which accounts for two-thirds of total demand.So, the fiscal policy prescription for a sluggish economy and high unemployment is lower taxes.
Investment
There are three components of investment employed in calculating GDP, they are; business spending, new residential construction and changes in inventory (Dwivedi, 2010). Of all the components of GDP, the Central Bank’s Monetary Policy affects investment first because each of the three components of investment relies heavily on bank loans or borrowing via the issue of bonds. Bank loans and bond issuance create money in the system, adding to the money supply, which fuels economic growth. When the Central Bank wants to slow the growth of the economy, it makes borrowing more expensive by raising interest rates, which leads to the removal of money from the system. Likewise, when the economy is in recession, the Central bank lowers rates to encourage borrowing. Low interest rates encourage businesses to invest in new plants and equipment and to increase inventory in anticipation of increased buying by other businesses and consumers. Real estate developers build new housing in anticipation of demand from consumers reacting to low mortgage rates.
Consumption
Consumption is the value of goods and services bought by people (Black, et al., 2009). Individual buying acts are aggregated over time and space. Consumption is normally the largest GDP component. Consumption may be divided according to the durability of the purchased objects. In this vein, a broad classification separates durable goods (as cars and television sets) from non-durable goods (as food) and from services (as restaurant expenditure). An increase in consumption raises GDP by the same amount, other things equal. Moreover, since current income (GDP) is an important determinant of consumption, the increase in income will be followed by a further rise in consumption.
Effect on Imports, Exports, and GDP
As shown in the GDP equation, GDP= C + I + G + (X – M), the expression (X- M) equals net exports, which may be either positive or negative. If net exports are positive, the nation’s GDP increases. If they are negative, GDP decreases. All nations want their GDP to be higher rather than lower, so all nations want their net exports to be positive. However, it is not possible for all nations to have positive net exports because as one nation exports more than it imports, its trading nation will be experiencing a situation of more imports to exports. Some countries use tariffs and quotas to influence exports and import. A tariff acts a tax on imports (makes imports expensive) and a quota regulates the amount of goods that is allowed into a country (Sodersten & Reed, 1994).
What GDP does not reveal
Over the years, most countries, including Ghana have placed emphasis on the growth of GDP. However, it is also important to understand what GDP cannot tell us. GDP is not a measure of the overall standard of living or well being of a country. Although changes in the output of goods and services per person (GDP per capita) are often used as a measure of whether the average citizen in a country is better or worse off, it does not capture things that may be deemed important to general well-being. So, for example, increased output may come at the cost of environmental damage or other external costs, such as noise. Or it might involve the reduction of leisure time or the depletion of nonrenewable natural resources. The quality of life may also depend on the distribution of GDP among the residents of a country, not just the overall level. To try to account for such factors, the United Nations computes a Human Development Index (HDI), which ranks countries not only based on GDP per capita, but on other factors, such as life expectancy, literacy, and school enrollment.
A shift from Economic Growth and GDP to Human development index (HDI)
The Human Development Index (HDI) is a composite statistic of life expectancy, education, and income indices used to rank countries into four tiers of human development. It was created by a Pakistani Economist Mahbub ul Haq and Indian Economist Amartya Sen in 1990 and was published by the United Nations Development Programme (Misra and Puri, 2009). In recent years, concerns have been raised about shifting from economic growth to human development in most developed economies. Yet, in most developing and under- developed countries, economic growth continues to be the cardinal point of the government of the day. Economic growth focuses on income; however, income is not the only component of development and individual wellbeing. Education and literacy, health, physical environment, sanitation, equality of opportunities to all persons irrespective of sex, political freedom, etc are just as important as income. Unlike the measurement of GDP, it is very difficult to measure human development. The quest to find a measure of human development led to the formulation of the Human Development Index by the United Nation Development Programme (UNDP).
Over the years, many Human Development Indices have been developed. Consequently, besides income, the HDI measures education and health, focuses the attention of policy making on the ultimate objective of development and portrays a true picture of inequality levels in the economy. The rankings for HDI for 2014 (estimates of 2013) revealed that Lybia ranked 1stin Africa and 55thin the world, followed by Mauritius who ranked 63rdin the world. Ghana was ranked 13thin Africa and 138thin the world (UNDP, 2014).
Conclusion
The components of GDP play an important role in determining the growth of an economy. All other things remaining equal, the GDP of a country can be increased through increased government expenditure, increased investment, increased consumption, increased exports and decreased imports. Government expenditure must however be directed towards projects that will lead to further investments. Some policies adopted by the government can affect some of the components of the GDP. If the government spends too much on projects that do not lead to further investments the economy suffers in the long run.
Also, actions of the citizens of a country can affect the GDP. Thus, anytime you demand for a foreign product in place of a locally manufactured product you are contributing to the importation of such a product and consequently such an action in the long run will lead to a depreciation of the cedi, unemployment, and lower GDP. Economic growth must translate into the reduction and eventual elimination of disease, illiteracy, squalor, unemployment and inequalities. Most economies; including Ghana, operate on the principle of taking care of the GDP so that it would take care of the citizen. How about we reverse this trend and take care of poverty so that it would take care of the GDP which would take care of the economic growth and eventually translate into economic development. Also shift in concentration from GDP to HDI by most African countries will be a step in the right direction to curb the economic hardship experienced in most African countries including Ghana.
References
Black, J. and Hashimzade, N. & Myles, G., 2009. Dictionary of economics, (3rd ed). New York: Oxford University press.
Dwivedi, D. 2010. Macroeconomics: Theory and Policy, (3rd ed). New Delhi: Tata McGraw Hill.
Human Development Report 2014 – Sustaining Human Progress: Reducing Vulnerabilities and Building Resilience. HDRO (Human Development Report Office) United Nations Development Programme. Retrieved 27 August 2014.
Mishra, S. K. and Puri, V. K. 2009. Indian Economy, (27th ed).India: Himalaya Publishing House
Sodersten, B. and Reed, G., 1994. International Economics(3rd ed). London: MacMillan Press Ltd.
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