I was talking with few eminent economists on the current financial crisis. I was trying to find out what’s their opinion on the real reasons behind the current financial crisis across the globe.
Our discussion started with a question “Why the high GDP growth rate is not the solution?”
Dr. Sugato mentioned that according to IMF, Libiya’s economy will grow by an astonishing 122% growth rate this year. But this does not mean that the Libya is fastest growing economy in the world.
Dr. Sugato went on to explain the fallacy in Libya’s 120% GDP growth rate with simple definition of GDP.
GDP is measure of income, not wealth. It gauges the flow of economic activity in a country, not its stock of productive assets. To understand this, we need to understand fiscal multiplier. Fiscal multiplier measures the impact of changes in Govt spending (or taxation) on broader GDP growth.
Change in any one of these components will also impact other components. If Govt. cuts spending by 1% , GDP falls more than 1 percent. It also impacts taxation i.e. Govt. income. This is the problem in most of the debt ridden Governments like Greece, Spain. These countries earlier financed their growth by debt but did not try to reduce the debt. Most of Government took the easy way to get over the financial crisis by printing paper money.
Even if Libya’s economy grow by 120%, it’s GDP will be no bigger than it was in 2010 because it’s economy shrunk by over 60% in 2011.
Dr. Marjit explained another important point on current recession i.e. less corporate spending or investment.
He mentioned that this recession also triggered “dead money” problem because corporate started sitting on cash pile.
Corporate are afraid of
(1) euro-zone crisis,
(2) political upheaval in middle east,
(3) possible recession in China and
(4) America’s economic health.
In Japan liquid assets have been soared by 75% to 2.8 trillion. Same is true for UK, Canada & US.
Corporate are neither investing nor distributing the money to shareholders. This frugal way of working is also impacting employment.
Five years on, the Great Recession is turning into a life sentence".
Our discussion started with a question “Why the high GDP growth rate is not the solution?”
Dr. Sugato mentioned that according to IMF, Libiya’s economy will grow by an astonishing 122% growth rate this year. But this does not mean that the Libya is fastest growing economy in the world.
Dr. Sugato went on to explain the fallacy in Libya’s 120% GDP growth rate with simple definition of GDP.
GDP is measure of income, not wealth. It gauges the flow of economic activity in a country, not its stock of productive assets. To understand this, we need to understand fiscal multiplier. Fiscal multiplier measures the impact of changes in Govt spending (or taxation) on broader GDP growth.
GDP = Consumption+ Investment+ Govt. Spending+ Imports+ Exports
Even if Libya’s economy grow by 120%, it’s GDP will be no bigger than it was in 2010 because it’s economy shrunk by over 60% in 2011.
Dr. Marjit explained another important point on current recession i.e. less corporate spending or investment.
He mentioned that this recession also triggered “dead money” problem because corporate started sitting on cash pile.
Corporate are afraid of
(1) euro-zone crisis,
(2) political upheaval in middle east,
(3) possible recession in China and
(4) America’s economic health.
In Japan liquid assets have been soared by 75% to 2.8 trillion. Same is true for UK, Canada & US.
Corporate are neither investing nor distributing the money to shareholders. This frugal way of working is also impacting employment.
Five years on, the Great Recession is turning into a life sentence".
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