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Concept of
Gross Domestic Product

Gross Domestic Product:

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GDP (Gross Domestic Product) is the total dollar amount of all goods and services produced

(finished goods only) within the national boundary of a country. It is one of the primary

indicators used to gauge the health of a country's economy. It represents the total dollar value

of all goods and services produced over a specific time period - we can think of it as the size

of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year.

For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has

grown by 3% over the last year.

GDP per capita is the share of individual members of the population to the annual GDP.

Mathematically it is calculated by dividing real or nominal GDP by the number of population per

year.

The growth rate is the percentage increase or decrease of GDP from the previous

measurement cycle. It is driven by retail expenditures, government spending, exports and

inventory levels.

Importance of GDP:

The GDP growth rate is the most important indicator of economic health. Economic production

and growth, what GDP represents, has a large impact on nearly everyone within that economy.

For example, when the economy is healthy, we will typically see low unemployment and wage

increases as businesses demand labor to meet the growing economy. A significant change in

GDP, whether up or down, usually has a significant effect on the stock market. A bad economy

usually means lower profits for companies, which in turn means lower stock prices. Investors

really worry about negative GDP growth, which is one of the factors economists use to

determine whether an economy is in a recession. If GDP is growing, so will business, jobs and

personal income. If GDP is slowing down, then businesses will hold off investing in new

purchases and hiring new employees, waiting to see if the economy will improve. This, in turn,

can easily further depress GDP and consumers have less money to spend on purchases. If the

GDP growth rate actually turns negative, then the economy is heading towards a recession. So,

GDP expresses very important things of the economy of a country-this is enough to understand

the importance of GDP.

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GDP per capita is indicator of the average standard of living of individual members of the

population. An increase in GDP per capita signifies national economic growth. As such,

economic planners and forecasters used the GDP per capita in monitoring economic growth

trend for time series. It aids them in developing economic policies and development plans since

the trend in GDP per capita at a specific period would clearly indicates whether the standard of

living of the population is improving or not. A declining trend in GDP per capita indicates a

sinking economy. Therefore, economic planners must come up with policies and infrastructures

to facilitate economic growth. An increasing trend in the GDP per capita on the other hand,

would prompt economic planners to implement various structural adjustments to prevent inflation

rate from increasing due to increase in the purchasing power of the individual members of the

population. Although faced with many issues and questions regarding the use of GDP as an

indicator of standard of living, economic critics could not discount the advantages of using GDP

to gauge the standard of living. For one, GDP is widely used and accepted in many countries.

It is frequently updated and monitored by country specific statistical bodies. This enables

country planners and economic think thanks to monitor the economic trend in a country of

regular and periodic basis.

Calculation of GDP:

Measuring GDP is complicated, but at its most basic, the calculation can be done in one of two

ways: either by adding up what everyone earned in a year (income approach), or by adding up

what everyone spent (expenditure method). Logically, both measures should arrive at roughly

the same total.

The income approach, which is sometimes referred to as GDP(I), is calculated by adding

up total compensation to employees, gross profits for incorporated and non incorporated firms,

and taxes less any subsidies. The expenditure method is the more common approach and is

calculated by adding total consumption, investment, government spending and net exports.

The basic formula for calculating the GDP is:

Y=C+I+E+G where Y = GDP

C = Consumer Spending
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I = Investment made by industry

E = Excess of Exports over Imports

G = Government Spending

To calculate the GDP, we only need to add together the various components of the economy

that are a measure of all the goods and services produced.

Many of the goods and services produced are purchased by consumers. So, what consumers

spend on them (C) is a measure of that component.

The next component is the quantity of "I," or investment made by industry. When calculating

the GDP, investment does NOT mean what we normally think of in the case of individuals. It

does not mean buying stocks and bonds or putting money in a savings account (S in the

diagram). When calculating the GDP, investment means the purchases made by industry in

new productive facilities, or, the process of "buying new capital and putting it to use". This

includes, for example, buying a new truck, building a new factory, or purchasing new software.

This is indicated in the diagram by an arrow pointing from one factory (enterprise) to another.

In essence, it shows the factory "reproducing itself" by buying new goods and services that will

produce still more new goods and services. There is a money-flow relationship between

personal savings, S, and investment, I, but this does not figure directly in calculating the GDP.

The next component is E, or the difference between the value of all exports and the value of

all imports. If Exports exceeds imports, it adds to the GDP. If not, it subtracts from the GDP.

Because the balance of trade can be either positive or negative, we can rewrite the equation,

showing the components of E, using X for Exports and M for Imports:

Y = C + I + (X - M) + G

The final component is G. The government buys goods and services (G). These purchases are

a measure of those goods and services produced. Many people make the mistake of thinking

that the money paid in taxes and spent by the government is "lost" and therefore subtracts
 Page |5

from the GDP. Tax money may indeed be spent inefficiently but this fact has no bearing on the

calculation of the GDP.

The ideal GDP growth rate is neither fast enough to cause inflation nor slow enough to cause

recession. Most economists agree that the ideal GDP growth rate is in the range of 2-3%.

Understanding Money Flow in the GDP Components:

The solid arrows in the figure indicate the components of the GDP, and the direction of the

money flows. The arrow indicating the Trade Deficit would be in the opposite direction in the

case of a Trade Surplus.

Drawbacks of GDP:

Despite this importance of GDP per capita as an indicator of economic growth, economic

theorists still find flaws and problems with it as an economic tool. Among these problems are,

the inability of GDP per capita to provide information about income distribution. Some income

derived from the black market, or those which were not reported to the government were not

accounted for. Likewise, GDP does not count volunteer work and services provided by social

workers and charity institutions. It also do not account for reconstruction work and services

done due to national disasters and calamities. Additionally, GDP as a statistical account is

subject to fraud especially from those who are engaged in tax evasion processes. Some

companies do not foreclose their true gross domestic transactions to lessen their tax payments.

Those are just some of the ongoing issues behind the value of Gross Domestic Product Per

Capita and GDP as a whole. And whether GDP per capita would continue to be of value to
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economic planners remains to be since and would greatly depend on whether other indicators

would be developed.

Concept of
Human Development Index
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Human Development Index:

The Human Development Index (HDI) is a summary measure of human development that is

published by the United Nations Development Programme (UNDP). The HDI provides an

alternative to the common practice of evaluating a country’s progress in development based on

per capita Gross Domestic Product (GDP).

“The process of economic growth is a rather poor basis for judging the progress of a country; it

is not, of course, irrelevant but it is only one factor among many.”

-Amartya Sen(Sen 2004)

The HDI is a composite index that measures the average achievements in a country in three

basic dimensions of human development: a long and healthy life, as measured by life

expectancy at birth; knowledge, as measured by the adult literacy rate and the combined gross

enrollment ratio for primary, secondary, and tertiary schools; and a decent standard of living, as

measured by gross domestic product (GDP) per capita in purchasing power parity (PPP) US

dollars.

Since the HDI was first published, it has gained wide recognition as a powerful tool for

monitoring human development. The HDI is constantly being monitored and trends in HDI

performance are re-calculated with better information in order to provide the best picture of

human development over time.

Origin of HDI:
 Page |8

There was a need in the development community for more information to be gathered and for

cross-country comparisons to be made.

This would mean countries themselves and the international community could observe

those making progress in human development and those not. HDI has, at its root, Professor

Amartya Sen’s writings on human deprivation, particularly in Less Developed Countries (LDCs)

like his own country, India. These humanitarian books and articles of Amartya Sen, in the

jungle of economic literature focused on ways and means to generate more and more wealth,

give Prof. Sen a special place among modern economists. Since he won the 1998 Nobel

laureate in economics for his contributions to welfare economics.

The Pakistani economist, the late Mahbub Ul Haq, made painstaking efforts to bring the

quantifiable elements of human deprivations under the fold of one common index called HDI.

Earlier, Amartya Sen endeavored to point out the forms which human deprivations assume, and

with his insight and ingenuity, he unraveled the causes of those deprivations. Mahbub Ul Haq

extended Sen’s economic viewpoint and constructed new deprivation indices.

On the basis of Haq’s ideas UNDP has been publishing deprivation indices of the following

categories: female illiteracy; existence of underweight children caused by malnutrition; and

deprivation of households from having access to safe drinking water. The most popular aspect

of the Human Development Report of the UNDP is, however, the combined index.

Importance of HDI:

The HDI has had a significant impact on drawing the attention of governments, corporations

and international organizations to aspects of development that focus on the expansion of

choices and freedoms, not just income. Performance in each dimension is expressed as a

value between 0 and 1, the higher the number the better the result.

Calculation of HDI:

The HDI measures the average achievements in a country in three basic dimensions of human

development:
 Page |9

 A long and healthy life, as measured by life expectancy at birth.

 Knowledge, as measured by the adult literacy rate (with two-thirds weight) and the

combined primary, secondary and tertiary gross enrollment ratio (with one-third weight).

 A decent standard of living, as measured by GDP per capita in purchasing power parity

(PPP) terms in US dollars.

Technically the HDI involves calculating a series of indices using primary data gathered from a

number of different international agencies (e.g. UN, World Bank, ILO, IMF etc.)As for any

index, the key thing is how to rank different countries – the HDI uses minimum and maximum

values of average age expectancy, of average education level and of average GDP per capita

(using purchasing power parity information so takes into account the cost of living in each

country relative to a base currency (the $US).

The basic index formula for life expectancy is:

Index = (average life expectancy for country X – minimum life expectancy)/(maximum

life expectancy – minimum life expectancy).

So the denominator is comprised of the largest gap possible in this index. The HDI

assumes that maximum age is 85 and minimum age is 25 – so the maximum gap possible for

the denominator is 60 years of age. The simple rule of interpretation of the various HDI

measures is the higher the HDI the better the country. Here, we can arise the question that,

where does the 85 years and 25 years ‘goalposts’ come from?

The Goalposts for calculating the HDI

Life expectancy at birth (years) maximum = 85 minimum = 25

Adult literacy rate (%) maximum = 100 minimum = 0

Combined gross enrolment ratio (%) maximum = 100 minimum = 0

GDP per capita (PPP US$) maximum = 40,000 minimum = 100

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Before the HDI itself is calculated, an index is created for each of these dimensions. To

calculate these indices—the life expectancy, education and GDP indices—minimum and

maximum values (goalposts) are chosen for each underlying indicator. For example, in 2004

the maximum and minimum values for life expectancy were 85 and 25 years, respectively.

Performance in each dimension is expressed as a value between 0 and 1. The HDI is then

calculated as a simple average of the dimension indices:

 HDI = 1/3 (life expectancy index) + 1/3 (education index)+ 1/3 (GDP index)

Calculation process of HDI

Drawbacks:

The HDI measures do NOT tackle issues related to good governance, political freedoms, etc.

The United Nations Development Programme (UNDP) though attempts to improve the human

indices and the gathering of information-for this they should be commended.A more serious

issue of the HDI is the maximum and minimum values used and the weights given to each of

the 3 components of the HDI. There is no theoretical reasoning for why life expectancy,

education and GDP should be given equal weighting in the HDI? By using arbitrary weightings

and maximum and minimum values the HDI is always going to be open to debate.

The research questions that must then be asked are:

(i) What values the weights should take?

(ii) Are the results sensitive to the arbitrary weightings?

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The HDI should consider taking account of income distributions in a country – the Human

Development Reports do provide information on income distributions and Gini coefficient

estimations.

As an exercise it would be interesting to estimate HDI that weight income inequality at

¼, so too GDP index, education index and life expectancy index.

 P a g e | 12

Relationship between GDP growth

rate and HDI

We have finished getting into the concept of GDP and HDI. Now we can get into the core of

our report which is the relationship between GDP growth rate and HDI. Although there is a

definite correlation between material wealth and human well-being, it breaks down in far too

many societies. Many countries have high GNP per capita, but low human development

indicators and vice versa. While some countries at similar levels of GNP per capita have vastly

different levels of human development. Success stories of countries such as Kyrgyzstan,

Mauritania, Nepal , Bangladesh proves that much progress can be achieved even at relatively

low levels of national income.

Given the imperfect nature of wealth as gauge of human development, the HDI offers a

powerful alternative to GNP for measuring the relative socio-economic progress at national and

sub-national levels. Comparing HDI and per capita income ranks of countries, regions or ethnic

groups within countries highlights the relationship between their material wealth on the one

hand and their human development on the other. A negative gap implies the potential of

redirecting resources to Human Development.

 P a g e | 13

To analyze the relationship, we need to have the data about GDP growth percentage, GDP
rankings, HDI value, HDI rankings about Bangladesh. The following tables contain our
necessary data:

Table-1: GDP (constant prices) and percentage changed:

Year Gross domestic product, Percent Change

constant prices
1996 5.013 5.09 %
1997 5.304 5.80 %
Source:
1998 5.044 -4.90 %
International 1999 5.421 7.47 % Monetary Fund
- 2008 World 2000 5.6 3.30 % Data under
Economic
Outlook 2001 4.834 -13.68 % Consideration
2002 4.845 0.23 %
2003 5.776 19.22 %
2004 6.108 5.75 %
2005 6.302 3.18 %
2006 6.43 2.03 %
2007 5.579 -13.23 %
2008 5.504 -1.34 %

Table-2: GDP value and GDP growth (decline) rate (current price):

Year Percent
Gross domestic product, Change
current prices
1996 41.516 4.89 %
1997 43.388 4.51 %
1998 44.757 3.16 %
1999 46.529 3.96 %
2000 47.048 1.12 % Data under
2001 47.194 0.31 %
2002 49.56 5.01 % Consideration
2003 54.476 9.92 %
2004 59.12 8.52 %
2005 61.127 3.39 %
2006 64.854 6.10 %
2007 72.424 11.67 %
2008 80.509 11.16 %

Source: International Monetary Fund – 2008 World Economic Outlook

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Table-3: GDP ranking

Year GDP Rank

1996 53
1997 53
1998
52 Data under
1999 52
2000 52 Consideration
2001 53
2002 53
2003 56
2004 56
2005 55
2006 52

Table-4: HDI value and ranking

Year Human Development Index HDI rank

1996 0.382 Not available
1997 0.395 150
1998 0.440 140
1999 0.461 137
2000 0.511 139 Data under
2001 0.470 132 Consideration
2002 0.502 139
2003 0.500 139
2004 0.504 132
2005 0.547 140
2006 0.524 147
2007 0.524 147

Table-5: percent change in HDI

YEAR HDI value Percent change

in HDI value
1996 0.460 -
1997 0.395 3.40%
1998 0.440 11.39%
1999 0.461 4.77%
Data under
2000 0.511 10.86%
Consideration
2001 0.470 -8.02%
2002 0.502 6.81%
2003 0.500 -0.40%
2004 0.504 0.80%
2005 0.547 8.53%
2006 0.524 -4.20%
2007 0.524 0%
Calculated from the previous data
 P a g e | 15

Now, for the purpose of analyzing the relationship, we will take 10 year’s data (1997-2006)

into consideration. In this section we will see the following graphical presentations of data about

Bangladesh for the years 1997 to 2006-

1. GDP ranks & HDI ranks

2. GDP values & HDI values

3. % change in GDP and % change in HDI

4. HDI rank trend and GDP growth

The topics above are being analyzed below:

1. GDP ranks & HDI ranks:-

160.00

140.00

120.00

100.00

80.00
HD
60.00 I
ra
nk
40.00
GD
20.00 P
ra
nk
0.00
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Here is the graphical presentation of GDP ranks and HDI ranks of Bangladesh from 1997 to

2006. The lines in the graph clearly say that, GDP ranks and HDI ranking do not give the

same result. For example, in the year 2006,HDI rank went upward compared to the previous

year but GDP rank went downward than the previous year.
 P a g e | 16

We care about human development not just because we want to know how to rank countries.

Rankings are not necessarily the best way to think about differences in living standards across

countries. For example, a cross-sectional rank correlation cannot tell us much about two key

issues that have been the focus of much of the cross-country macro development literature:

understanding what drives improvements over time in well-being and understanding how

inequality across countries has evolved. On both of these questions, the H.D.I. and G.D.P. give

considerably different answers.

So, GDP ranking has very little effect on HDI ranking.

At first we consider changes over time. Improvements over time in human development differ

significantly from growth rates of per-capita income. It may happen because, changes in health

and education is very different from changes in income. These differences between the H.D.I.

and G.D.P. suggest some very different priorities.

Inflation is negatively and significantly related to changes in H.D.I. but not to growth. Trade

openness and the rule of law are positively and significantly related to G.D.P. growth but not

with H.D.I.; in fact, openness gets a negative though insignificant coefficient in the H.D.I.

regression. In other words, the implications of cross-country regressions for development policy

depend crucially on whether we are interested in raising G.D.P. growth or in increasing the

H.D.I.

Next we think about international disparities in living standards. Researchers have tried to sort

out whether inequality across countries is increasing or decreasing. while cross-country

dispersion in (log) income per capita has been increasing, dispersion in H.D.I.’s has been

declining. Again, looking at H.D.I. and looking at per-capita income gives substantively different

answers.

2. GDP value and HDI value:-

Now, lets see what GDP value and HDI values say about Bangladesh economy. We will take

data from table-1(GDP value-constant price)and table-4(HDI value).

 P a g e | 17

8
7
6
5
4
GDP value
3 HDI value
2
1
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

The lines here clearly show difference between them. Where the GDP values have changed

noticeably each year, there are very few changes in the HDI line. It indicates that, increase or

decrease in GDP values does not have much effect on HDI values. This is the result of the

fact that, peoples living quality is the combination of many other factors.

When HDI is greater than GDP, it reveals how development has taken the place of excess

income, which no longer necessarily needs to be high, for opportunities of health and education

are available to a larger extent to the nation as a whole. This can provide the nation with the

development needed for the optimal growth, which would allow development to be sustained as

growth continues.

When GDP is greater than HDI, it reveals how production has taken the place of developing

the population to the degree in which now fewer people have the access to education and

health because the money is invested possibly back into the economy for growth to achieve

some other objective than to increase the overall welfare of the public.

3. % change in GDP and % change in HDI

 P a g e | 18

25

20

15

10

5
HDI
GDP
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
-5

-10

-15

-20

Though, considering percentage change in HDI values is not practiced widely, we are using this

measure for the purpose of understanding the relationship. This graphical picture shows that,

percentage change in HDI values is far more different than percentage change in GDP values.

In the year 2006, where HDI % change was negative, that year, GDP growth rate was

positive. Again, In the year 1998, where HDI % change was positive, that year, GDP growth

rate was negative Even where the percentage change direction is same, there is a great

difference in the rate (year-2000, 2001, 2002, 2004).

Since GDP per capita is used in calculating HDI, there are not many countries with high HDI

and low GDP (or vice versa). Only a few countries categorized as "High Human Development"

are not categorized as "High Income" by GDP. But, the matter is, there are some countries

with high HDI and low GDP and vice versa.

4. HDI rank trend & GDP growth

 P a g e | 19

180

160

140

120

100
HDI
80 GDP growth

60

40

20

0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Here is a graphical presentation of ten year’s GDP growth-current price(table-2) and HDI

rank(table-4).We can see here that, HDI ranks and GDP growth have a little similarities.

With a highly developed nation, money is no longer the means by which things are valued
 P a g e | 20

Correlation between GDP value

& HDI value
 P a g e | 21

Now, we are going to measure the relationship between GDP and HDI with the help of

correlation analysis. For this purpose, we will take the GDP values and the HDI values of years

1997 to 2006.

2 2
Year GDP x HDI y xy
x y
(X) (X-X ) (Y) (Y-Y)
1997 .05304 -0.00296 0.000008762 0.395 -0.05 0.0025 0.000148
1998 .05044 -0.00556 0.000030914 0.440 -0.005 0.00002
5 0.0000278
 P a g e | 22

1999 .05421 -0.00179 0.000003204 0.461 0.016 0.00025

6 -0.00002864
2000 .056 0.00 0.00 0.511 0.065 0.00423 0
2001 .04834 -0.00766 0.000058676 0.470 0.025 0.00062
5 -0.0001915
2002 .04845 -0.00755 0.000057003 0.502 0.057 0.00325 -0.00043035
2003 .05776 0.00176 0.000003098 0.500 0.055 0.00303 0.0000968
2004 .06108 0.00508 0.000025806 0.504 0.059 0.00348 0.00029972
2005 .06302 0.00702 0.00004928 0.547 0.102 0.010404 0.00071604
2006 .0643 0.0083 0.00006889 0.524 0.079 0.00624 0.0006557

Total 0.55664 0.000305633 4.453 0.03404

0.00129357
=

0.55664

X= =0.055664(=0.056)

10

4.453

Y= =0.445

10

Σ xy 0.00129357

r=

√ x2 × y2 √ (0.000305633 ×0.03404)

0.00129357

0.003225484
 P a g e | 23

= 0.401046788(=0.401)

So, there is a moderate degree of positive correlation.

0.6

0.5

0.4

0.3 HDI values

GDP values
0.2

0.1

0
1 2 3 4 5 6 7 8 9 10

The graphical presentation here also represents a moderate degree of positive correlation

between HDI values and GDP values which has been calculated in the previous page.
 P a g e | 24

Components responsible for changes

in GDP growth and HDI
 P a g e | 25

Main component that are responsible for changes in GDP and HDI are:-

Consumer Spending

Investment made by industry

Excess of Exports over Imports

Government Spending

Life expectancy index

Education index

The economic changes that are responsible for changes in GDP and HDI from 1997 to 2006

are given below:

Year 2006:
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GDP growth in FY2006 is 2.03%, down slightly from the preceding year, but GDP value

improved that year compared to the preceding year. In that year, HDI percent change was

negative (-4.20%). These are the results of the economic changes in 2005.Some of

these are-

. During the first 4 months of FY2005, manufacturing output, boosted by garment

production, rose by 8% over the same period in the previous year. During the first half of

the year, exports recorded a 15.2% gain over the same period of FY2004 with an

especially strong performance in knitwear (up by about 38%). Imports are also projected

to pick up in FY2005, by 20.0%, due to increases in industrial raw materials, capital

goods, and oil. During the first 5 months of the year, imports jumped by 22.8%. Additional

foreign assistance has been available in FY2005 and foreign exchange reserves rose (by

about $300 million) to $3.0 billion at end-January 2005. Rice was produced 28.8 million

metric tons in 2005-2006 (July-June). By comparison, wheat output in 2005-2006 was

9 million metric tons. Population pressure continues to place a severe burden on

productive capacity, creating a food deficit, especially of wheat. But foreign assistance and

commercial imports fill the gap. Many new jobs--1.8 million, mostly for women--were

created by the country's dynamic private ready-made garment industry, which grew at

double-digit rates. Bangladesh also has established export processing zones in Iswardi

(2005), Uttara (2006). There have been some interesting shifts in the composition of

various blocs and also in the relative percentage in response; however, the

“worse/downgraded” scenario for majority of the indicators continued to prevail in 2005.

More than 95% of businessmen in 2005 have very strongly expressed their dissatisfaction

with respect to the role of politicians. In the first half of FY2005, revenues under the

National Board of Revenue were only 9% higher than in the same period of the previous

year, and well below the 16.7% targeted in the budget

Year 2005:

GDP growth in FY2005 is 3.18%, down slightly from the preceding year, but GDP value

improved that year compared to the preceding year. In that year, HDI percent change was

(8.53%). These are the results of the economic changes in 2004.Some of these are-
 P a g e | 27

In the period July-April FY04 reveals that the growth of total internal trade-related revenue

was higher (12.57 percent) than that of total import-related revenue (8.61 percent). .

Foreign exchange reserves at the end of April 2004 stood at $2747.0 million compared to

the corresponding months of the previous year when it was $1874.3 million. This was a

rise of $872.7 million or 46.6 percent. More than 98% of businessmen in 2004 have very

strongly expressed their dissatisfaction with respect to the role of politicians. The

devastating floods of July-September 2004 affected about 38% of the country, the floods

caused extensive damage to standing crops, infrastructure, and livelihoods of 36 million

people across 39 districts. Meanwhile, the Government in December 2004 raised prices of

kerosene and diesel by 15% to Tk23 per liter, to reduce the losses of the state-owned

Bangladesh Petroleum Corporation and to alleviate pressure on the government budget

caused by high international oil prices. Overall inflation, on a 12-month moving average

basis, has been on a rising trend and reached 6.1% in December 2004, with the food

component at 7.5%. The import situation in FY04 has reversed compared to FY03 when

the sector registered a negative growth of (-) 2.7 percent compared to FY02. As actual

imports for the first eight months indicate, imports during July-February FY04, at $6596.9

million, posted an increase of 16.9 percent compared to the corresponding period of FY03.

Although to some extent this growth was underwritten by a rise in imports of food grains

(by 51.3 percent); imports without food grains also posted an impressive growth of 15.8

percent. The relatively good performance of the food grain production has been

foreshadowed by the Monga situation in FY04 prevailing in some Northern districts of

Bangladesh. The foreign investment figure for the first two quarters of FY04 compares

favorably with that for FY03 with a 36.30 percent increase. Net flow of FDI increased by

81.48 percent, while EPZs recorded around 14.8 percent growth during the July-December

FY04 period. The investment employment, production and export situation had been better

in first three quarters of FY04, in comparison to FY03. The export sector demonstrated

remarkable resilience and the momentum generated in FY03 have been sustained in

FY04. Export accruals rose from $4722.2 million to $5420.9 million registering a growth

of 14.8 percent over the first nine months of the fiscal year compared to the corresponding
 P a g e | 28

period of the previous year. This was slightly higher than what was targeted for the period

(higher by 0.04 percent), and was a good performance by any measure.

Year 2001-2004:

GDP growth in FY2004 is 5.75%, down from the preceding year, but GDP value improved

that year compared to the preceding year. In that year, HDI percent change was (.80%).

These are the results of the economic changes in 2004.Some of these are-

Production of food grain reduced in FY02 and FY03. According to the data obtained from

the BBS, total food grain (rice and wheat) production in the greater Rangpur region in

FY02 was 11.62 percent lower than that of FY01. On the other hand, total food grain

production in FY03 was 5.87 percent lower than that of FY01. Reduced food grain

production has resulted in reduction of employment opportunities for harvesting and

processing of agricultural commodities. Loss of crops due to floods in ’03 has also

aggravated the situation by delaying the transplanting time thereby reducing employment

opportunities for land preparation, transplanting and weeding of Aman rice. The traditional

instruments for disaster relief such as Test Relief (TR), Food for Work and Vulnerable

Group Feeding (VGF) programmes have been reduced this year resulting in lower

entitlement opportunities in the lean period CPD field work further revealed that, for their

survival, monga affected people tried to cope with the situation in the following ways:

Forward sale of their labor at reduced wages. Selling of crops (paddy) in advance at a

lower price is another result of monga. In FY03, the manufacturing sector recorded 6.6

percent growth with its medium and large component expanding at a slightly lower than

average rate (6.0 percent). On a point to point basis, industrial production has declined

between February 2003 and 2004 by about (-) 2.75 percent. Conversely, the first eight

months’ average QIP for FY04 is only 1.53 percent higher than the same in FY03. About

half of the investors (50.60 percent) mentioned that they have expanded their base in

FY03, whilst this share increased to 53.70 percent in FY04. More importantly, a little over

20 percent of the investors admitted to investing in new businesses during FY03 and

FY04. Following a secular decline in the volume of foreign aid disbursement since FY99,
 P a g e | 29

a growth of more than 26 percent was recorded in FY03 compared to the preceding year.

In FY03 foreign aid committed to Bangladesh amounted to about $2179 million, whilst

actual disbursement was in the region of $1577 million. More people were employed in

FY03. Producers have increased their volume of production. After a secular fall from the

peak in FY98 till FY02, foreign investment for the first time recorded an increase in FY03

($196.63 million from $114.80 million). No rational reason could be identified behind the

upward surge observed in the market in November-December 2003. 64 (29 percent)

companies out of 221 did not pay any dividend in 2000 and 49 in 2001 (21 percent) out

of 230 companies, whereas 76 (32 percent) companies out of 241 companies are yet to

declare dividends for 2002. It is suspected that the lucrative initial public offerings of

banks attracted a significant amount of undeclared money to the capital market. It is also

reckoned that a number of blue-chip securities had been under-valued for a long time and

their prices went up as they started declaring good dividends. Import Exports recovered

somewhat in FY03 when earnings registered a growth of 9.4 percent following the

negative growth of (–) 7.4 percent in FY02.

Year 1997-2001:

GDP growth in FY2004 is (-)13.68%, down from the preceding year, but GDP value

improved that year compared to the preceding year. In that year, HDI percent change was

(-)8.02%. These are the results of the economic changes in 2004.Some of these are-

The lowest growth rate (3.2 percent) in the manufacturing sector was recorded during the

1990s in the year of severe floods, i.e. in FY99. Bangladesh made notable progress in

income-poverty reduction during the 1990s.the income-poverty at the national level has

declined from 58.8 percent in 1991/92 to 49.8 percent in 2000. The progress was faster

during the nineties compared with the eighties. The faster pace of poverty reduction in the

nineties is attributable to the accelerated growth in income. The pace of rural poverty
 P a g e | 30

reduction was slow in the eighties, but became faster in the nineties. The reverse was true

for the urban areas. It is well known that poverty trends are influenced by the changes in

inequality. Income inequality at the national level has increased from 25.9 percent in

1991/92 to 30.6 percent in 2000. During the same period, urban inequality was rising

much more (from 30.7 to 36.8 percent) than rural inequality (from 24.3 to 27.1 percent).

The Household Income of Expenditure Survey 2000 (HIES 2000) reveals that income

accruing to top 5 percent of the households is about 46 times larger than that of poorest

5 percent of the households. The comparable multiple in 1995-96 was 27 times. On a

broader scale, concentration of income in the hands of the top 20 percent of households

increased from 50.1 percent in 1995-96 to 55.0 percent in 2002. Conversely, the share

of income accruing to the bottom 20 percent of households during the same period

decreased from 5.71 percent to 4.97 percent. As a consequence of the above trends the

Gini-coefficient deteriorated from 0.432 in 1995-96 to 0.472 in 2000. Income disparity is

more pronounced in rural areas compared to the urban areas. The growing concentration

of financial wealth in Bangladesh is also revealed by the fact that the top one percent of

account holders in the banking sector control about three-quarters of the banking assets.

On the other hand, only 13.5 percent of the assets in the banking sector accrues to the

bottom 95 percent. Curiously, in this process of income differentiation, the middle class

(defined as themiddle 20 percent of the households) is getting marginalized. In 1995-96,

this group controlled about 14 percent of the national income; to compare, by 2000 this

share has fallen to 12.5 percent. In the late 1990s the government's economic policies

became more entrenched, and some of the early gains were lost, which was highlighted by

a precipitous drop in foreign direct investment in 2000 and 2001. On June 30, 2002, the

government took a bold step as it closed down the Adamjee Jute Mill, the country's largest

and most costly state-owned enterprise. The initial impact of the end of quotas under the

Multi-Fiber Arrangement has been positive for Bangladesh, with continuing investment in

the ready-made garment sector, which has experienced annual export growth of around

20%. Though the indicators were promising as of 1997, the government's delay in

instituting needed reforms threatened to slow economic advances. Inflation rose to 7%,

while GDP had slowed to 4%. The Awami League promoted the exploration, distribution
 P a g e | 31

and manufacture of oil and gas in Bangladesh in the late 1990s, but stalled on the details

of contracts. As 2002 ended, exploration continued to be delayed by political squabbles

over participation by foreign companies. The economy grew strongly during 1998; real

growth reaching 5.4% as flooding, instead of devastating the economy, brought in some

much needed foreign aid. Severe flooding also occurred in 1999, and growth slowed to

4.9%, and 3.4% in 2000. The global economic slowdown and the after-effects of the 11

September 2001 terrorist attacks on the United States and the War on Terror in 2001,

combined with continuing internal political turmoil are projected to have brought economic

growth almost to a halt in Bangladesh, with an estimated growth rate of 1.6%.

Bangladesh has been experiencing a modest, but stable 5+ percent GDP growth rate in

the recent past. However, the deteriorating distribution of income suggests that the some

of the citizens are disproportionately benefiting from the incremental income generated in

the economy.
 P a g e | 32

World GDP Trend

 P a g e | 33

Changes in the size and structure of national economies and the effects of these changes 

on the global economy are the topic of this section. The indicators in this section include

measures of macroeconomic performance (GDP, consumption, investment, and

international trade) and of stability (central government budgets, prices, the money supply,

the balance of payments, and external debt).

Economy recovery continues

     Stronger performance by high-income economies in 2003 helped the world economy

continue its recovery. The world economy grew 2.8 percent, an increase of 1 percentage

point over 2002 but below the peak of 4 percent in 2000. The world’s recorded output—

and income—grew by almost $4 trillion in nominal terms. The low-income economies,

boosted by an unprecedented 8.6 percent growth in India, registered the fastest growth,

followed by lower middle-income economies. The upper middle-income economies grew by

3.3 percent, reversing the previous year’s negative growth trend. The better performance

was due to above-average growth in Argentina, Latvia, Lithuania, Malaysia, Poland, and

Saudi Arabia. High-income economies grew by 2.2 percent.

                
Long-term growth trends

     Economic growth in the past decade was fastest in the developing economies of East

Asia and Pacific (averaging 6.7 percent a year) and South Asia (5.5 percent). Leading

this growth were China and India, each accounting for more than 70 percent of its

region’s output. The two regions continued to do well in 2003, with East Asia registering

8.1 percent growth and South Asia recording 7.5 percent growth.

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     The transition economies of Europe and Central Asia continued their strong recovery,

growing at an impressive 5.8 percent in 2003, after an average of 3.3 percent in 2000–

02. Several countries of the former Soviet Union—such as Armenia, Azerbaijan, Tajikistan,

and Turkmenistan—registered growth of more than 10 percent, buoyed by increased

exports of natural gas and petroleum products. Russia also did well with growth of 7.3

percent in 2003, an increase from 4.7 percent in 2002, but still below the 10 percent in

2000.

     In Latin America and the Caribbean and the Middle East and North Africa growth was

faster in the 1990s than in the 1980s. But growth in Latin America decelerated sharply in

2001 and turned negative in 2002. The economies of Argentina, Uruguay, and Venezuela

experienced large negative growth in 2002, while growth decelerated in Brazil and Mexico

in 2001 and 2002. Better performance in 2003 by Argentina, Mexico, and Uruguay

resulted in positive growth for the region, although growth in Brazil turned negative, and

Venezuela, yet to recover, saw its GDP fall by 9.4 percent. The Middle East and North

Africa region saw its growth rate more than double over 2002, due to about 7 percent

growth in Algeria, Iran, and Saudi Arabia. The heavily indebted poor countries, many in

Sub-Saharan Africa, registered 4.2 percent growth in 2003. Nigeria (10.7 percent) and

Sudan (6 percent) had above average performance. As a result, Sub-Saharan Africa

continued to improve its performance over earlier periods, with 3.9 percent growth.

     With two decades of high growth, the total GDP of East Asia and Pacific nearly

reached that of Latin America and the Caribbean. By contrast GDP in the Europe and

Central Asia region, almost equal to that of East Asia and Pacific in 1992, is now only half

the GDP of East Asia and Pacific after a decade of stagnant economic performance. With

steady growth, South Asia’s GDP has almost caught up with that of the Middle East and

North Africa, but GDP per capita lags far behind in this populous region.

 
 P a g e | 35

Growth paths
     Most developing economies are following familiar growth paths, with agriculture giving

way first to manufacturing and later to services as the main source of income. But some,

such as Jordan and Panama, have moved directly from agriculture to service-based

economies. For most economies services have been the fastest growing sector. In 1990–

2003 the service sector grew by 3.8 percent a year in developing and transition

economies and by 3.1 percent in high-income economies. Among developing regions

South Asia had the fastest growth in services in the 1990s, at 7 percent a year, and

Europe and Central Asia the slowest, at 1.7 percent .

(Source: World Bank data files.)

With more than two decades of rapid growth East Asia and Pacific has caught up with

Latin America and the Caribbean.

 P a g e | 36

(Source: World Bank data files.)

           

    Services in developing economies generated slightly more than half of GDP in 2003,

compared with 71 percent in high-income economies. But in East Asia and Pacific services

produced only 36 percent of GDP, and from 1990 to 2003 growth in manufacturing, at 10

percent a year, outpaced growth in services, at 6.8 percent. This trend reflects the rapid

growth of manufacturing in China (11.7 percent a year), which also had rapid expansion in

services (8.8 percent a year).

                 
The contribution of trade
     Global trade (exports plus imports) grew by 6.3 percent in 2003, recovering from the

low 3.6 percent in 2002. Trade in high-income economies, which account for more than

75 percent of global trade, grew by only 2.3 percent in 2002, after recovering from the

decline in 2001. But trade in the low-income economies increased by 12.3 percent in
 P a g e | 37

2003, and in the middle-income economies by 11.2 percent.

     Trade in merchandise—primary commodities and manufactured goods— continues to

dominate. In 2003 merchandise accounted for 81 percent of all exports of goods and

commercial services, and manufactured goods for 77 percent of merchandise exports.

Exporters of primary nonfuel commodities saw their trade volumes increase, but a

continuing decline in their terms of trade left them with less income. The economies of

Sub-Saharan Africa were hit particularly hard.

     The structure of trade in services is also changing. Transport services are being

replaced in importance by travel, insurance and financial services, and computer,

information, and other services. In the 1990s high-income countries were the main

exporters of financial services. Now, many developing countries are emerging as exporters

of these new services along with computer, information, and business services.

     With expanding trade, and favorable current account balances, some exporting

countries are accumulating large international reserves. The large trade deficit of the

United States ($531 billion) and the efforts by many Asian exporters with large current

account surpluses to prevent their currencies from appreciating against the dollar have

resulted in large accumulations of international reserves in Asia. Workers’ remittances,

growing steadily in countries like India, also contributed to favorable current account

balances and higher reserves. India has the seventh largest reserves, ahead of most high-

income countries. Japan has the largest reserves, followed by China. Of the 10 economies

with the largest reserves, seven are in Asia.

Steady trends in consumption, investment, and saving

     Most of the world’s output goes to final consumption by households (including

individuals) and governments. The share of final consumption in world output has

remained fairly constant over time, averaging about 80 percent in 1990–2003. Growth of

per capita household consumption expenditure provides an important indicator of the

 P a g e | 38

potential for reducing poverty. In 1990–2003 per capita consumption grew by 5.7 percent

a year in East Asia and Pacific but by only 0.2 percent in Sub-Saharan Africa,1.7 percent

in Europe and Central Asia, and 2.7 percent in South Asia.

    Output that is not consumed goes to exports (less imports) and gross capital formation

(investment). Investment is financed out of domestic and foreign savings. High-income

countries consume a larger share of their output than do developing countries. So, some

high-income countries, like the United States and United Kingdom, with low savings rates

have to rely more on foreign savings to finance their investment.

    In 2003 the global savings rate averaged 21 percent of total output. But global

averages disguise large differences between countries. Savings rates are consistently lower

in Sub-Saharan Africa. And they tend to be volatile in countries dependent on commodity

exports. Gross domestic savings in the Middle East and North Africa rose from 20 percent

of GDP in 1990 to 32 percent in 2003, buoyed by higher oil prices. The highest savings

rate was in East Asia and Pacific, where gross domestic savings averaged above 35

percent during most of the past decade and reached 41 percent in 2003.

    Between 1990 and 2003 the rate of gross capital formation increased by about 7.9

percent a year in East Asia and Pacific and 6.4 percent in South Asia, but declined by

4 percent in Europe and Central Asia. East Asia and Pacific continued to have the highest

investment rate in the world, at 38 percent of GDP in 2003. By contrast, investment

averaged only 19 percent of GDP in Sub-Saharan Africa. Developing countries invested a

larger proportion of their GDP (25 percent) than did high-income countries, which as a

group saved and invested only about 20 percent of GDP.

                   
Greater monetary and fiscal stability
      Governments, because of their size, have a large effect on economic performance.

High taxes and subsidies can distort economic behavior; when governments finance large

fiscal deficits by growth of the money supply, the likelihood of inflation increases. As
 P a g e | 39

governments have adopted policies leading to greater fiscal stability, inflation rates and

interest rates have tended to decline. In 2003, 32 countries had double-digit inflation

measured by the GDP deflator, down from nearly 50 in 2000 when the highest inflation

rate was 516 percent.

     The central governments of developing countries have had larger cash deficits than

have high-income countries. Central governments of South Asian economies had expenses

averaging 16 percent of GDP in 2003 and revenues (mainly from taxes on goods and

services) averaging 12 percent of GDP, leaving a cash deficit of about 4 percent of GDP

after taking grants into account.

     Government expenses are mostly for the purchase of goods and services (including

the wages and salaries of public employees) and for subsidies and current transfers to

private and public enterprises and local governments. The rest go to interest payments and

other expenses. In 2003 subsidies and other transfers accounted for 61 percent of

government spending in high-income economies and 55 percent in Europe and Central

Asia, but only 11 percent in the Middle East and North Africa

The sources of government revenue have been changing. Taxes on international trade

declined between 1995 and 2003. Taxes on income, profits, and capital gains and taxes

on goods and services increased during the same period. High-income economies

depended more on income taxes (28 percent) compared with low- and middle-income

economies, which derived 32 percent of their revenue from taxes on goods and services

and 8 percent from taxes on trade.

External debt continues to increase

     In 2003 the external debt of low- and middle-income economies increased by $220

billion in nominal terms, about 9 percent of their total debt stock in 2002. But the external

debt burden measured as the ratio of external debt to gross national income continued to

decline for all income groups (except upper middle-income economies) and regional

groups (except Latin America and the Caribbean). The total debt burden declined

significantly for the Sub-Saharan African countries, down 11 percentage points to 58

 P a g e | 40

percent in 2003. The upper middle-income economies saw an increase of 2 percentage

points to 36 percent—Latin America and the Caribbean saw an increase of 1 percentage

point to 47 percent.

    The debt servicing burden declined overall for developing countries by 1 percentage

point in 2003. The largest improvement was for Sub-Saharan Africa, with a decline of 3

percentage points to 8 percent of the value of exports of goods and services, income, and

workers’ remittances. South Asia saw an increase of 2 percentage points to 16 percent,

and Latin America and the Caribbean an increase of 1 percentage point to 31 percent.

Percent of economic activity by sector

Economic activity-Agriculture Economic activity- Economic activity-

Industry Service
1990 2001 1990 2001 1990 2001
World 5 4 33 29 62 62
Developed 3 2 33 26 65 72
countries
Developing 15 11 36 37 49 52
countries
(Source:-UNCTAD Handbook of Statistics On-

line)
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GDP/cap growth (1990-2001)

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