Gross Domestic Product (GDP)

1.0. What is GDP?

The gross domestic product (GDP) is one of the primary indicators used to gauge the health of a
country's economy (Investopedia, 2015). It represents the total dollar value of all goods and
services produced over a specific time period; you 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. As one can imagine, economic production and growth, what GDP represents, has a
large impact on nearly everyone within that economy. For example, when the economy is
healthy, you will typically see low unemployment and wage increases as businesses demand
labour to meet the growing economy. A significant change in GDP, whether up or down, usually
has a significant effect on the stock market. It's not hard to understand why: 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 (Investopedia, 2015).

2.0. How to calculate 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 (Gaurav Kumar, 2016).

3.0. Types of GDP

3.1. GDP (E)
GDP (E) is GDP calculated using the expenditure approach. It is the sum of expenditures on
household consumption, government consumption, gross fixed capital expenditure, changes in
inventories and net exports. Net exports are exports minus imports. GDP (E) is the most used
measure of GDP and is considered the most accurate measure (This Matter, 2016).

3.2. GDP (I)

GDP (I) is GDP calculated using the income approach. It is derived as the sum of factor incomes,
consumption of fixed capital (depreciation) and taxes less subsidies on production and imports.
Factor incomes include wages, salaries and other compensation of employees plus gross
operating surplus, or profit, of private companies and other entities. In theory, this approach
measures the income received by all producers in the country (OCMS, 2016).
3.3. GDP (P)
GDP (P) is GDP calculated using the production approach. It is derived as the sum of gross value
added for each industry, at basic prices, plus taxes less subsidies on products. Industries are
sectors of the economy such as agriculture, mining and manufacturing. Basic values mean the
amounts received by producers, including the value of any subsidies on products, but before any
taxes on products. In theory, this approach measures the market value of all good and services
produced (OCMS, 2016).

3.4. Real or Nominal GDP

When comparing GDP in one time period with another, the changes are influenced by inflation.
The basic measure of GDP in current prices is known as "nominal GDP." When changes are
made to account for the influence of inflation, the figure is called "real GDP." It can also be
referred to as "GDP at constant prices," or as a "volume estimate of GDP." Real GDP is
calculated by dividing nominal GDP by a price deflator. Each of the three measures of GDP can
be expressed in real or nominal terms (OCMS, 2016).

4.0. Current Statistics and Trends

Pakistan is one of the poorest and least developed countries in Asia. Pakistan has a growing
semi-industrialized economy that relies on manufacturing, agriculture and remittances. Although
since 2005 the GDP has been growing an average 5% a year, it is not enough to keep up with fast
population growth. To make things even worst, political instability, widespread corruption and
lack of law enforcement hamper private investment and foreign aid (Trading Economies, 2016).
For FY14-15 ending in June, Pakistan’s GDP grew 4.2pc which confirms two consecutive years
of increased growth after a couple of years of stagnancy.

The difference between budgeted and achieved real GDP growth was much greater than it has
been in previous years, displaying a need for the government to set realistic and achievable
targets for economic performance (Trading Economies, 2016).
 Figure 1 - Annual real GDP growth trend 2009-2015 source: (Trading Economies, 2016)

While the GDP growth rate is commendable given Pakistan's past performance, growth is still far
below the 5-7pc required to absorb new entrants into the labour force to check rising
unemployment. If we compare these numbers with GDP growth for the entire South Asian
region — of which Pakistan is the second largest economy — we find that Pakistan’s growth of
almost 4pc in the past five years lags its regional peers in South Asia which averaged almost 7pc
(as shown below) (Trading Economies, 2016).

Figure 2 - GDP Trends source: (Trading Economies, 2016)

Bangladesh has been growing at over 6pc for the past few years while India, despite two years of
modest growth in 2012 and 2013, has been able to maintain average growth of well over 5pc in
the past five years. Growth this year was driven by gains in the agriculture, manufacturing and
services sectors (Hayat, 2016).
 Figure 3 - Growth Drivers

5.0. Government Actions

Government of Pakistan is currently working in the following sectors for the improvement of
GDP of Pakistan.

5.1. Growth and Investment

Global economic growth during the outgoing year has witnessed some continuing signs of
improvement with a pick-up in high-income economies along with some improvement in
developing countries. China and Pakistan have made agreements to establish China Pakistan
Economic Corridor between the two countries. The corridor will serve as a driver for
connectivity, trade in the world is expected to increase and Pakistan will take benefits through
multiple dimensions (Ministry of Finance, 2014).
Major success of the outgoing fiscal year includes: picking up economic growth, inflation
contained at lowest level since 2003, improvement in tax collection, reduction in fiscal deficit,
worker remittances touches new height, successful launching of Sukuk, foreign exchange
reserves significantly increased and stock market created new history. The GDP growth
accelerates to 4.24 percent in 2014-15 against the growth of 4.03 percent recorded in the same
period last year. The growth momentum is broad based, as all sectors namely agriculture,
industry and services have supported economic growth. The agriculture sector accounts for 20.9
percent of GDP and 43.5 percent of employment, the sector has strong backward and forward
linkages. The agriculture sector has four sub-sectors including: crops, livestock, fisheries and
forestry (Ministry of Finance, 2014).
Foreign private investment has reached to $1666.2 million during July-April 2015 as compared
to $1050.3 million showing 58.6 percent higher as compared to last year. Out of total foreign
investment, the FDI inflow has reached to $2057.3 million. The major inflow of FDI is from US,
Hong Kong, UK, Switzerland and UAE. Oil & gas exploration, financial business, power,
communications and Chemicals remained major recipients (Ministry of Finance, 2014).
Public investment as a percent of GDP increased to 3.86 percent against the 3.36 percent last
year. During July-March, 2014-15 credit to private sector flows increased to Rs.228.2 billion
against the expansion of Rs.305 billion in the comparable period last year. National savings are
14.5 percent of GDP in 2014-15 compared to 13.7 percent in 2013-14. Domestic savings is
witnessed at 8.4 percent of GDP in 2014-15 as compared to 8 percent of GDP in 2013-14. Net
foreign resource inflows are financing the saving investment gap. Present government has
launched comprehensive plan to create investment friendly environment and to attract foreign
investors in the country. As is evident, the capital market has reached to new height and emitting
positive signals for restoring the investor’s confidence (Ministry of Finance, 2014).

5.2. Agriculture
The agriculture growth stood at 2.9 percent during July-March, 2014-15 as compared to 2.7
percent during the last year (Ministry of Finance, 2014).

5.3. Manufacturing and Mining

Large Scale Manufacturing (LSM) during July-March 2014-15 registered a growth of 2.5 percent
as compared to 4.6 percent in the same period last year. The Year on Year (YoY) growth for
March 2015 stood at 4.5 percent as against negative growth of 1.0 percent in March 2014.
The sector showing growth during July-March 2014-15 such as Iron and Steel Products 35.63
percent, Automobiles 17.02 percent ,Leather Products 9.62 percent, Electronics 8.21 percent,
Pharmaceuticals 6.38 percent , Chemicals 5.94 percent , Non Metallic mineral products 2.56
percent, Coke & Petroleum Products 4.73 percent , Fertilizers 0.95 percent and Textile 0.50
percent. Automobile sector such as trucks, tractors, cars & jeeps and LCVs registered growth of
53.9 percent, 44.6 percent, 23.1 percent and 31.2 percent, respectively. (Ministry of Finance,
2014)

Enlist above are some of the factors in which government of Pakistan took action to improve
GDP of the country.
Bibliography
Gaurav Kumar. (2016). What is GDP? How is it calculated and how is it related to the Indian
economy? What's a brief explanation for this? Retrieved 07 21, 2016, from Quora:
https://www.quora.com/What-is-GDP-How-is-it-calculated-and-how-is-it-related-to-the-
Indian-economy-Whats-a-brief-explanation-for-this
Hayat, M. U. (2016, 06 06). Pakistan Economic Survey: Two years of growth and several missed
targets. Retrieved 07 21, 2016, from Dawn:
http://www.dawn.com/news/1186172/pakistan-economic-survey-two-years-of-growth-
and-several-missed-
targets?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+dawn-
news+(Dawn+News)
Investopedia. (2015, 03 15). What is GDP and why is it so important to economists and
investors? Retrieved 07 21, 2016, from Investopedia:
http://www.investopedia.com/ask/answers/199.asp
Ministry of Finance. (2014). Pakistan Economic Survey . Retrieved 07 21, 2016, from Finance.
Gov: http://www.finance.gov.pk/survey/chapters_15/Highlights.pdf
OCMS. (2016). Types of GDP. Retrieved 07 21, 2016, from OCMS:
http://www.ocms.be/info_8176524_types-gdp.html
This Matter. (2016). Gross Domestic Product (GDP). Retrieved 07 21, 2016, from This Matter:
http://thismatter.com/economics/gross-domestic-product.htm
Trading Economies. (2016). Pakistan GDP Growth Rate. Retrieved 07 21, 2016, from Trading
Economies: http://www.tradingeconomics.com/pakistan/gdp-growth