The Impact of Consumption and Investment on the GDP in Saudi Arabia - Research Paper Example

The impact of Consumption and Investment on the GDP in Saudi Arabia (1990- Introduction: GDP at purchase prices is defined as the summation of gross value which is added by all the producers residing in the economy. GDP at purchase prices is tax and subsidy adjusted, where taxes are being added and subsidies are subtracted from the gross value of the goods. Final Consumption expenditure is the summation of final private consumption which comes from the households in the economy and government final consumption expenditure. Final Consumption expenditure was formerly known as total consumption. Gross domestic investment or Gross capital formation is the change in the amount of fixed assets in the economy which is adjusted to the net changes in the inventories. Fixed assets of an economy consists of construction of drains, ditches, fences, setting up of industries and plants, purchase of new machines and equipments, building infrastructure like roads and railways and construction of public utility places like schools, colleges, universities, hospitals etc. The stock of goods which are maintained by the firms so that they can meet demand during uncertain times and unexpected fluctuations in production process is known as Inventories (World Bank, 2014). In Keynesian theory aggregate demand which is the GDP has four components: Consumption, Planned Investment, Government Purchases and net exports. Consumption has its dependence on current disposable income and other factors like wealth, general price level etc. As the income of a country increases the consumption also increases. Consumption is a rising function of income. Marginal Propensity to consume signifies the change in the amount of consumption when the change occurs in disposable income and the change in total consumption depend on the MPC. Again since consumption is a part of aggregate expenditure, the rise in MPC will lead to rise in consumption and the GDP will also rise (Mankiw, 2003). There is a relation between economic growth process and investment or capital formation. Emphasis has been laid on capital accumulation as a driver of economic growth has been done by both neo classical and Marxist economist. All growth models focus on capital as one of the important parameter in determining the rate of economic growth. As given in the World Bank report of 1989, higher GDP growth has been noticed for those countries which have a relatively higher investment to GDP ratio (Anwer & Sampath, 1999). As per Keynesian model the increase in planned investment has a multiplied effect on GDP. Any increase in autonomous expenditure leads to rise in GDP or aggregate expenditure. There is no dependence of autonomous expenditure on the GDP level. In Keynesian model investment, Government expenditure and net exports does not depend on GDP level but consumption has a both autonomous part and a non autonomous part. When Investment level increases, multiplier effect occurs via MPC and a new higher GDP is attained (Mankiw,2003). In this paper via regression analysis we will see the impact of consumption and investment on GDP in Saudi Arabia. Data Description: Data has been collected for Saudi Arabia for variables like GDP (current US$), Final consumption expenditure, etc. (% of GDP) and Gross capital formation (% of GDP) for a period of 1990 – 2013. The figures have been converted to US$ billion. Gross capital formation is the gross investment made in Saudi Arabia. Final Consumption and Gross Capital formation is given as % of GDP in data. So we have calculated the values in current US$ terms for investment and consumption and then has conducted the regression analysis. To look at the nature of the GDP, investment and consumption, we have plotted them across time. Looking at the GDP curve we see with time the GDP has increased for Saudi Arabia except in 2009 when it dropped from 519796.8 million(US$) to 429097.9 million(US$). The investment graph has also followed the same trend as the GDP. It has dropped from 141882.7 million (US$) to 136089.6 million (US$). But looking at the consumption we see, it as a stable rising graph over time. Some basic descriptive statistics like mean, median,Q1, Q3, variance, standard deviation , minimum and maximum has been calculated for the variables GDP, Consumption and Investment given in table1 below. The values are in billion US$. The average GDP, consumption and investment are 300.08, 167.13 and 72.97 billion US$. The maximum GDP, consumption and investment in Saudi Arabia has been observed for the year 2013 while the minimum is in 1990. Standard deviation of the three variables tells us that the yearly values are deviated from the mean values for the same. Table 1: Descriptive Statistics GDP (current US$) Final Consumption Gross Investment Mean 300.08 167.13 72.97 Q1 143.29 104.43 30.32 Q2 (Median) 188.50 119.09 36.18 Q3 425.80 224.25 129.59 Variance 39920.35 7720.50 3482.47 Standard Deviation 199.80 87.87 59.01 Maximum 745.27 384.73 202.21 Minimum 116.78 88.64 17.60 Skewness 1.12 1.34 1.06 Kurtosis 0.01 0.67 -0.44 We have performed the statistical tests to ensure the accurate image of evolution of GDP of Saudi Arabia. The average value for Saudi Arabia of GDP for 1990-2013 is 300.08 billion US$ with a variation between a minimum value of 116.78 billion US$ (at the end of 1990) to a maximum value of 745.27 billion US$ (at the end of 2013).Looking at the distribution of the values for GDP for the considered time period, we see it is not perfectly symmetrical as the value of skewness is not zero and the distribution for GDP is flat as kurtosis Read More