Page | 1

Concept of
Gross Domestic Product

Gross Domestic Product:

Page | 2
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.
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

Page | 3
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
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.

Page | 4
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 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

Page | 5
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 economic planners remains to be since and would
greatly depend on whether other indicators would be developed.

Concept of
Human Development Index

Page | 6

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
countrys 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:
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 Sens 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.

Page | 7
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 Sens
economic viewpoint and constructed new deprivation indices.
On the basis of Haqs 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:

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).

Page | 8
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

Before the HDI itself is calculated, an index is created for each of these
dimensions. To calculate these indicesthe life expectancy, education and GDP
indicesminimum 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

Page | 9
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?
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 , so too GDP index, education index and life expectancy index.

P a g e | 10

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.
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:

P a g e | 11

Year

Gross domestic product, constant

prices

Percent Change

1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008

5.013
5.304
5.044
5.421
5.6
4.834
4.845
5.776
6.108
6.302
6.43
5.579
5.504

5.09 %
5.80 %
-4.90 %
7.47 %
3.30 %
-13.68 %
0.23 %
19.22 %
5.75 %
3.18 %
2.03 %
-13.23 %
-1.34 %

Source: International Monetary Fund - 2008 World Economic

Outlook

Data under
Consideration

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

P a g e | 12

Year

Percent
Change

Gross domestic
product,
current prices

1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008

41.516
43.388
44.757
46.529
47.048
47.194
49.56
54.476
59.12
61.127
64.854
72.424
80.509

4.89 %
4.51 %
3.16 %
3.96 %
1.12 %
0.31 %
5.01 %
9.92 %
8.52 %
3.39 %
6.10 %
11.67 %
11.16 %

Data under
Considerati
on

Source: International Monetary Fund 2008 World Economic

Outlook

Table-3: GDP ranking

Year

GDP Rank

1996

53

1997

53

1998

52

Data under

1999

52

Considerati
on

P a g e | 13

2000

52

2001

53

2002

53

2003

56

2004

56

2005

55

2006

52

Table-4: HDI value and ranking

Year
1996

Human Development Index

0.382

1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

0.395
0.440
0.461
0.511
0.470
0.502
0.500
0.504
0.547
0.524
0.524

HDI rank
Not
available
150
140
137
139
132
139
139
132
140
147
147

Data under
Consideration

Table-5: percent change in HDI

YEAR

HDI value

1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

0.460
0.395
0.440
0.461
0.511
0.470
0.502
0.500
0.504
0.547
0.524
0.524

Percent
change in
HDI value
3.40%
11.39%
4.77%
10.86%
-8.02%
6.81%
-0.40%
0.80%
8.53%
-4.20%
0%

Calculated from the previous data

Data under
Consideration

P a g e | 14
Now, for the purpose of analyzing the relationship, we will take 10 years data
(1997-2006) into consideration. In this section we will see the following graphical
presentations of data about Bangladesh for the years 1997 to 20061.
2.
3.
4.

GDP ranks & HDI ranks

GDP values & HDI values
% change in GDP and % change in HDI
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

HDI rank

GDP rank

60.00
40.00
20.00
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.
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

P a g e | 15
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).
8
7
6
5
4

GDP value

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

P a g e | 16
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
25
20
15
10
5

HDI

GDP
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 | 17

180
160
140
120
100
80

HDI
GDP growth

60
40
20
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Here is a graphical presentation of ten years 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 | 18

Correlation between GDP value

& HDI value

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.

Yea
r
199
7
199
8
199
9

GDP
(X)
.05304

x
(X-X )
-0.00296

0.000008762

HDI
(Y)
0.395

y
(Y-Y)
-0.05

.05044

-0.00556

0.000030914

0.440

-0.005

.05421

-0.00179

0.000003204

0.461

0.016

xy

0.0025
0.000148
0.00002
5
0.00025
6

0.0000278
-0.00002864

P a g e | 19
200
0
200
1
200
2
200
3
200
4
200
5
200
6

.056

0.00

0.00

0.511

0.065

0.00423

.04834

-0.00766

0.000058676

0.470

0.025

.04845

-0.00755

0.000057003

0.502

0.057

0.00062
5
0.00325

Tot
al=

0.5566
4

0
-0.0001915
-0.00043035
.05776

0.00176

0.000003098

0.500

0.055

0.00303
0.0000968

.06108

0.00508

0.000025806

0.504

0.059

0.00348

.06302

0.00702

0.00004928

0.547

0.102

.0643

0.0083

0.00006889

0.524

0.079

0.01040
4
0.00624

0.00029972
0.00071604
0.0006557
0.000305633

4.453

0.55664
X=

=0.055664(=0.056)
10
4.453

Y=

=0.445
10
xy

0.00129357

r=

x2 y 2

(0.000305633 0.03404)

0.00129357
=
0.003225484
= 0.401046788(=0.401)
So, there is a moderate degree of positive correlation.

0.03404

0.00129357

P a g e | 20

0.6
0.5
0.4
HDI values

0.3

GDP values

0.2
0.1
0
1

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 | 21

Components responsible for changes

in GDP growth and HDI

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:

P a g e | 22
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 areIn the period July-April FY04 reveals that the growth of total internal traderelated 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

P a g e | 23
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 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 areProduction 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

P a g e | 24
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, 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 areThe 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 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

P a g e | 25
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 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

P a g e | 26
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.

World GDP Trend

P a g e | 27
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 worlds recorded outputand incomegrew 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 years 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 regions 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.
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 200002. Several countries of the former Soviet
Unionsuch 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

P a g e | 28
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 Asias
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.

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 19902003 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:
files.)

World

Bank

data

P a g e | 29

With more than two decades of rapid growth East Asia and Pacific has caught
up with Latin America and the Caribbean.

(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 2003, and in the
middle-income economies by 11.2 percent.
Trade in merchandiseprimary commodities and manufactured goods
continues to dominate. In 2003 merchandise accounted for 81 percent of all

P a g e | 30
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 SubSaharan 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 worlds 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 19902003. Growth of per capita household consumption
expenditure provides an important indicator of the potential for reducing
poverty. In 19902003 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

P a g e | 31
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 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 highincome 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

P a g e | 32
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 percent in 2003. The upper middle-income economies saw an
increase of 2 percentage points to 36 percentLatin 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

World
Developed
countries
Developing
countries

Economic activityAgriculture
1990
2001
5
4
3
2

Economic activityIndustry
1990
2001
33
29
33
26

Economic activityService
1990
2001
62
62
65
72

15

36

49

11

37

(Source:-UNCTAD Handbook of Statistics

On-line)

52

P a g e | 33
GDP/cap growth (1990-2001)

P a g e | 34