Economic growth

In macroeconomics, there is a concept that is often used to describe the

changes that are found in different organizations, such as countries or
organizations of international stature. This concept is known as economic growth.

RGDP current year −RGDP previous year

Economic growth= x 100
RGDP previous year

Economic growth is defined as the increment in the production of goods and

services, comparing two periods of time. In other words, economic growth is known
as the expansion of the production possibilities of an economy (PPF). On the other
hand, in order to compute economic growth, we need to familiarize with some
important concepts. (Diane, 2012)

GDP

Gross domestic product or GDP is, as its name says, are the total
production (gross) of an institution or country (domestic) of gods and services
(product). It’s very important concept inside of modern macroeconomics, since
from this arise another fundamental concept that we will see later. GDP can be
computed from three different ways:
Y →income paid by the firms
 Adding up all the product of the economy.
 Adding up all the spending of the economy. C → consumption expenditures

o GDP=Y =C+ I +G+(X− M ) I → investment

 Adding up all the income of the economy. G → government expenditures

o GDP=Y =C+ I +G+ ( X −M ) ( X −M ) → net exports
 Deficits and investment. S → private savings
o GDP=Y =C+ S +T T → taxes

Market prices influence in a big way the calculation of GDP, since is well known
that de change in a price can affect in a big measure the production and
consumption of a country. Due to this GDP is divided in two kinds:
  Nominal GDP: value of the total production of goods and services within a
country using the prices of each year.
 Real GDP: value of the total production of goods and services within a
country using the prices of a base year.

Example:

Nominal GDP:

NGDP 2003= (100 )( $ 1.00 ) + ( 20 ) ( $ 5.00 )=$ 200.00 (1)

NGDP 2004 =( 160 )( $ 0.50 ) + ( 22 ) ( $ 22.50 )=$ 575.00 (2)

Real GDP:

NGDP 2004/2003 =( 160 ) ( $ 1.00 )+ ( 22 )( $ 5.00 )=$ 270.00 (3)

Analyzing the results obtained in the previous example we can notice that, if we
only consider NGDP, we would not be sure of having increased or decreased
production. This is the main difference between NGDP and RGDP, such that
RGDP considers inflation and allows to compute more precisely economic growth.

Another known method to compute RGDP called chain-weighted output

index method (Steindel, 2007), whose fundamental change is that this method
considers the average economic growth of each year, which allows to obtain a
more precisely approximation of economic growth. This is very important because
the base year method only considers the economic growth of one year. This would
change the results if we choose a different base year. chain – weighted RGDP in
computed in the next way:

1. Obtain previous and current year GDP using last year prices.
 2. Obtain previous and current year GDP using current year prices. Then
calculate the growth rate of last and current year.
3. Obtain the average economic growth of both years. This value is the
economic growth rate f previous year.
4. Repeat with adjacent years.

Example:

First, we obtain previous and current GDP with previous year prices:

2002 (Base year)

GDP2002 =( 100 ) ( $ 1.00 ) + ( 20 )( $ 5.00 )=$ 200.00

GDP2003/ 2002=( 160 ) ( $ 1.00 )+ ( 22 )( $ 5.00 )=$ 270.00

$ 270.00−$ 200.00
Growt h rate 2003/ 2002= x 100=35 % (1)
$ 200.00

Now we repeat the same procedure, but, with current year prices:

GDP2002/ 2003=( 100 ) ( $ 0.50 ) + ( 20 ) ( $ 22.50 )=$ 500.00

GDP2003 =( 160 ) ( $ 0.50 )+ ( 22 )( $ 22.50 )=$ 575.00

$ 575.00−$ 500.00
Growt h rate 2002/ 2003= x 100=15 % (2)
$ 500.00

Obtain the average growth rate and obtain RGDP:

35 % +15 %
Average growthrate= =25 %
2

RGDP2003= ( $ 200.00 ) ( 1+0.25 )=$ 250.00

We also can obtain RGDP through the GDP deflator or price level, which is the
average of prices of the goods and services in the current year, expressed as a
percentage of a base year prices.

NGDP
GDP deflator = x 100
RGDP

So now, ¿ what causes economic growth? ¿which are its effects in the economy?
To answer this question is necessary to explain the relationship that allow us to
obtain RGDP. This relationship its known as the Aggregate production function.

Aggregate production function

In an economy, the aggregate quantity of goods and services that are

supplied depend on three factors: quantity of labor (L), quantity of capital (K) and
the state of technology (T). This is how we obtain the aggregate production
function, a function that will show us how the RGDP supplied is related on the
variables previously mentioned. This relationship Is showed below:

RGDP=Y =F( L , K ,T )

In this function we consider K and T as constant, because they not vary too much
in the short run, while L can vary due to other factors. Some of the aspects that can
change aggregate supply are:

 Short run aggregate supply

o A change in the money wage rate.
o Change in prices of resources (energy, oil, gas, etc.).
o Investment (it’s also considered by some economists).
 Long run aggregate supply (potential GDP)
o A change in the quantity of labor.
o A change in the quantity of capital.
o A change in technology
o A change in income taxes.
In order to achieve economic growth, the economies need to reach a state called
full employment or long run macroeconomic equilibrium. In a very resumed way,
this is achieved when an economy is using its recurses to the fullest (
RGDP supplied=Potential GDP). (Victor, 2008)

Note: RDGP supplied it’s achieved when RGDP demanded=RGDP supplied.

Once we´ve obtained all necessary data to compute economic growth, we

can make comparisons. From this comparison we can obtain valued information
like: economic welfare or predictions in the business cycle.

The Economic Growth (GDP) in Mexico expanded 0.2 % in Mar 2019, following a
growth of 1.7 % in the previous quarter. So, economic growth data in Mexico is
updated quarterly, from Mar 1981 to Mar 2019, with an average rate of 2.8 %.
The data reached an all-time high of 10.2 % (8.526) in Jun 1981 and a record
low of -8.6 % in Jun 1995.

Nominal GDP of Mexico reached 303.5 USD in Dec 2018. Its GDP deflator (implicit
price deflator) increased 5.3 % in Dec 2018. GDP Per Capita in Mexico reached
9,817.3 USD Dec 2018. Its Gross Savings Rate was measured at 23.6 % in Dec
2018.
Mexico has struggled for three decades to raise trend growth rates. Mexico's real
GDP growth has fallen behind that of other similar developing nations, both in Asia
and in Latin America. As a result, GDP per capita and other improvements in living
standards have stagnated.
Mexico has a serious productivity challenge that can be traced to what is often
called the “two Mexico's"—a highly productive modern economy and a low-
productivity traditional economy.

The two Mexico's are moving in opposite directions: while the modern sector
flourishes, competes globally, and raises productivity rapidly, in traditional Mexico
(with very small, often informal enterprises), productivity is plunging.

Since 1981, GDP growth in Mexico has averaged 2.3% a year. In 2012, the output
of the average Mexican worker was about $17.90 per hour in purchasing power
parity, still below the $18.30 per hour of 1981. Mexican GDP per capita, which was
12 times China's in 1980, is now only 25 percent higher, and, at current growth
rates, China could surpass Mexico by 2018.

Mexico's economy faces low economic growth in 2019, the first year of the
government of Andrés Manuel López Obrador, who promised that by the end of his
administration, in 2024, GDP will grow up to 4%.

Mexico's GDP grew 2% in 2018, and by 2019, the analysts who consult the Central
Bank every month cut their growth forecasts to 1.5% from the 1.8% estimated at
the beginning of the year.
The cut in the forecast of growth is not only of the private analysts. The Bank of
Mexico itself and the Ministry of Finance reduced their expectations to a range
between 1.1 and 2.1%.

For the 2018-2024 period, inflation is projected at 3.4 percent, the dollar at 20
pesos, the Mexican mix at $ 55, with an export platform of 1.016 million barrels per
day.

Other central elements of the General Criteria of Economic Policy indicate that the
interest rate will be 8.3 percent, a current account deficit of 2.2 percent.

These estimates assume that the Mexican GDP will decelerate from 2.9 to 2.6
percent, its industrial production will go from 3.7 percent to 2.7 percent and inflation
in this country will fall from 2.5 to 2.2 percent.

Bimbo in Mexico:

Consumer demand, preferences, real prices and the costs of raw materials are
heavily influenced by macroeconomic and political conditions in the other countries
where the Group operates. (Hernández, 2017)

When economic conditions deteriorate, the end markets for the Group’s products
may experience declines, and we may suffer reductions in the Group’s sales and
profitability. In addition, the financial stability of the Group’s customers and
suppliers may be affected, which could result in decreased, delayed or canceled
purchases of our products, increases in uncollectable accounts receivable or non-
performance by suppliers.

Grupo Bimbo cannot predict the impact that political developments in Mexico will
have on the Mexican economy nor can provide any assurances that these events,
over which we have no control, will not have an adverse effect on its business,
financial condition, results of operations and prospects. In addition, government
forecasts of Mexico’s economic growth may affect rating agencies’ perception of
the country, which may have a negative effect on Mexico’s credit ratings issued by
international rating agencies, which may, in turn, adversely affect the Group’s
business, financial condition and results of operations.

Bibliography:

Diane, C. (Ed.). (2012). El Producto Interno Bruto: una historia breve pero
entrañable. FCE - Fondo de Cultura Económica.

Steindel, C. (2007). Chain-Weighting: The New Approach to Measuring GDP. Ssrn,

1(9), 1–6. https://doi.org/10.2139/ssrn.1001249

Victor, P. A. (2008). Managing without growth : slower by design, not disaster.

Edward Elgar.

Instituto Nacional de Estadística y Geografía. (2018) PIB, tasa de crecimiento

trimestral. Trading Economics. 2019.
https://es.tradingeconomics.com/mexico/gdp-growth

CNN. (2019). Fitch Rating baja su pronóstico de crecimiento económico para

Mexico. https://cnnespanol.cnn.com/2019/03/21/fitch-rating-baja-su-
pronostico-de-crecimiento-economico-para-mexico-en-2019/