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Eco304.1 - Group Project
Eco304.1 - Group Project
Section 1, ECO304
Introduction ............................................................................................................3
Methodology ...........................................................................................................4
Conclusion ............................................................................................................29
References.............................................................................................................30
Appendix...............................................................................................................31
Introduction
Since gaining its independence in 1971, the economy of Bangladesh has witnessed a remarkable
transformation. The country has consistently shown resiliency and perseverance over the past few
decades, overcoming numerous obstacles in the political, financial, and economic sector to become
one of South Asia's fastest-growing economies. After liberation, various limitations such as
infrastructure gaps, bureaucratic inefficiencies, corruption, and vulnerability to natural calamities
presented several challenges to sustainable development of the nation. However, despite its
initially constrained resource base, the country has been able to successfully utilize its human
capital, promoting economic diversification and lowering poverty levels by various policy
measures to recover from those circumstances and greatly progress over the years. We want to use
our report to explain the economic resiliency of Bangladesh quantitively and sort out what is
causing particular features in the economic cycle by reviewing the country’s key economic
statistics in great detail.
The first section of this report includes analysis of the key economic indicators: Real GDP,
consumption, investment, government expenditure, export, and import for Bangladesh for the
reference period (1981-20221). Each component has been (graphically) showcased in three criteria:
actual trend, HP trend, and cyclical trend. In order to construct the HP trend & cyclical component
from the actual data series we've utilized the Hodrick-Prescott (HP) filter. The HP filter aims to
separate the long-term component of a time series from the shorter-term cyclical fluctuations by
ignoring the short price swings. The evolution of each component is summarized below individual
graphs. We then proceed to analyze and report the relativeness between the cyclical components
of real GDP and other variables using a regression model run with the help of STATA. Lastly, we
highlight some alternative explanations for Bangladesh's significant business cycle changes
between 1981 and 2022 to wrap up our analysis.
1
The World Development Indicators database of The World Bank lacks the requisite data for the year 2022 under the
reference period.
Methodology
In this economic analysis report we have used The World Development Indicators database of the
World Bank to compile all the data and information about the specified variables. The datasets we
have taken are: Real Gross Domestic Product, Final Consumption Expenditure per capita, Gross
Fixed Capital Formation as Investment according to Solow Growth model, and General
Government Final Consumption Expenditure. Using the Hodrick-Prescott (HP) Filter, each data
series was separated from its trend. The cyclical component was computed by deducting the trend
value from the actual value and finally valued as a percentage of the trend value. For data analysis
the research considered the cyclical component of Consumption, Investment, Government
Expenditure, Export and Import as Independent variable and Business cycle, or cyclical
component of Real GDP as Dependent variable. The research used STATA to conduct a
multivariate regression to understand the effect of independent variables on the dependent variable.
T-test and F-test were used to investigate the significance of the independent variables on the
dependent variable.
Graphical Analysis: Trends & Cyclical Components
Real GDP
The diagram above, which was taken from the WDI website, unmistakably shows an upward trend
throughout the specified time frame. The real GDP is seen to reach its maximum peak in 2021,
with the highest value being $285,269,493,337.993, The upward trend can be explained by the
average annual growth rate of 5.16%.
An augmenting annual growth rate of real GDP generally indicates positive economic performance
and expansion within a country.
HP Trend
11.7
11.5
11.3
11.1
10.9
10.7
10.5
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
It can be observed that both the HP trend and Log GDP graphs are expanding over the reference
period and overlapping with each other. An easy interpretation of this situation would be that, after
removing all kinds of short-term variation, the Real GDP exhibits an increasing tendency.
The cyclical movement of the real GDP depicts a stable fluctuating pattern. First, from the years
1981-1989 there remains a falling trend which seems to become somewhat stable until 2004. A
major concave down pattern is observed when the real GDP hit a record low in 2004. The cycle
then takes an upward beat from the year 2007 to 2019, the peak value observed in the year 2019
following an even sharper fall in the year 2020.
Consumption
Figure 2: Households and NPISHs Final consumption expenditure per capita (constant 2015 US$); Source - WDI
With an average growth rate of 4%, consumption of Bangladesh is on the rise since the beginning
of our reference period. The highest value can be observed in the year 2021 at
$197,422,319,350.85.
Again, both the HP trend and Log GDP graphs are seen to be rising and overlapping with each
other. This increasing tendency of these two graphs can explain the rising trend of consumption
we have seen earlier. We can say, after removing all kinds of short-term fluctuations, consumption
exhibits an increasing trend as well.
The cyclical trend of consumption displays an upward trend with greater fluctuation in the given
period. The trough of the business cycle can be observed in 2003 at -1.43% while the peak can be
seen at 1.69% in 2007. The sharp downward fall from the year 1995 to 1999 & the upward jump
from 2004 to 2009 is quite noticeable from the diagram.
Investment
Figure 3: Gross fixed capital formation2 (constant 2015 US$), Source - WDI
As can be seen in the accompanying graph, Bangladesh's investment has been growing steadily
since 1981, with an annual growth rate of 7.78% on average. The highest value of investment can
be observed in the recent year of 2021 which is at precisely $89,550,219,055.67.
2
Investment in the Solow model corresponds to the portion of output used to increase the capital stock. In national
accounts, the term "gross fixed capital formation" (GFCF) is used to quantify investment.
The constant expanding HP trend implicates an increasing tendency in investment over the
reference period of 1981-2022.
The diagram starts with a steady cyclical rise from 1981 until the year 1988, followed by sharp
decrease till 1993, when the investment hit a record fall (-3.08%). However, after two more major
fluctuations from the years 1994-2001 & 2002-2005, investment seems to have taken a stable form
in recent years.
Government Expenditure
$16,000,000,000.00
$14,000,000,000.00
$12,000,000,000.00
$10,000,000,000.00
$8,000,000,000.00
$6,000,000,000.00
$4,000,000,000.00
$2,000,000,000.00
$0.00
Figure 4: General government final consumption expenditure (constant 2015 US$); Source - WDI
As shown in the diagram above, an increasing trend can be seen from 1981 to 2021. The average
growth rate is 5.24%. This is reflected in the rising real GDP trend as well as government
expenditure kept on increasing throughout the years. It started with around $2 billion in 1981 and
by 2021 it rose to almost $16 billion with the maximum being $15,932,227,752.11.
HP Trend
10.2
10
9.8
9.6
9.4
9.2
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
Excluding all kinds of short-term fluctuations, we can see that both the HP trend and Log
Expenditure curve follow an increasing trend, which follows the growing government expenditure
trend.
Cyclical Government Expenditure
4.00%
3.00%
2.00%
1.00%
0.00%
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
-1.00%
-2.00%
-3.00%
-4.00%
If we investigate the cyclical trend, we can see that the government expenditure has fluctuated
from 1981 to 2021. Some of the sharpest declines are observed in 1991 (the highest drop among
all the years), between 1999 and 2001, and finally in 2013. There were also periods of increased
government expenditure: 1986, 1994, 2006, and in 2019. According to the diagram the highest rise
was in around 1994 with was at almost 3.00%.
Export
$40,000,000,000.00
$35,000,000,000.00
$30,000,000,000.00
$25,000,000,000.00
$20,000,000,000.00
$15,000,000,000.00
$10,000,000,000.00
$5,000,000,000.00
$0.00
Figure 5: Exports of goods and services (constant 2015 US$); Source - WDI
Exports of Bangladesh had a slow and steady rise from 1981, until in 1994 the pace of the rise in
export increased. However, in 2003 it experienced a drop. From 2004 the exports accelerated at a
pace never seen before. It dropped again in 2009 until it picked up again in 2010. The export graph
shows an increasing trend over the stated years with an average growth rate of 10.33%. The highest
recorded exports in Bangladesh were in 2019 at a whopping $40,121,541,590.30.
HP Trend
10.6
10.4
10.2
10
9.8
9.6
9.4
9.2
8.8
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
HP trend implies that there has been a steady increase in the exports of goods and services all
through these years.
Cyclical Export
15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
-15.00%
-20.00%
-25.00%
Now, if we observe the cyclical trend, we can see that there have been fluctuations in exports over
the mentioned years. Exports started to decline from around 2000 and was at its lowest in 2003
(almost at -0.20%). However, it started to rise from 2004 and reached its highest level in 2007 with
a little over 0.1%. It was to drop again in 2010, 2017 and finally in 2020, with observable rises in
2013 and 2019.
Import
$60,000,000,000.00
$50,000,000,000.00
$40,000,000,000.00
$30,000,000,000.00
$20,000,000,000.00
$10,000,000,000.00
$0.00
1981
2015
2019
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2017
2021
Figure 6:Import of Goods and Services (Constant 2015 US$); Source - WDI
As shown in the graph above, the imports of Bangladesh have been experiencing an increasing
trend since 1981 with an average growth rate of 9.27%. However, there was a reduction in imports
in 2010 and again in 2016. The highest import can be seen in 2021 which is at precisely
$60,002,065,790.76 billion.
HP Trend
10.8
10.6
10.4
10.2
10
9.8
9.6
9.4
The HP trend implies that there has been a steady increase in the imports of goods and services all
through these years.
Cyclical Import
15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
-15.00%
-20.00%
As seen from the graph, the cyclical imports had their shares of highs and lows over the years.
While it was fluctuating from 1981 to 1988. In 1990 it reached one of its highest points of a little
over 5.00%. Imports started to drop from 1991, until in 1993 they reached a low of around -
10.00%. In 2003, it reached its lowest negative value of around -15.00%. The notable high values
were in the years 1982,1997, 2013 and 2019 with the highest in 2007 at a little over 10.00%. The
second highest peak is in 1997.
Data Analysis
𝑌̂ = 3.38e-14 +0.2160591𝑋1
̂ + 0.223944𝑋2
̂ + 0.0020953𝑋3
̂ + 0.0665891𝑋4 ̂
̂ − 0.0622682𝑋5
Here,
Y = Cyclical GDP
➢ The slope coefficient of 0.2160591 means that keeping all other variables constant, a
change in cyclical consumption by 1 unit will increase the cyclical component of GDP by
0.2160591 units.
➢ The slope coefficient of 0.223944 means that keeping all other variables constant, a change
in cyclical investment by 1 unit will increase the cyclical component of GDP by 0.223944
units.
➢ The slope coefficient of 0.0020953 means that keeping all other variables constant, a
change in cyclical expenditure by 1 unit will increase the cyclical component of GDP by
0.0020953 units.
➢ The slope coefficient of 0.0665891 means that keeping all other variables constant, a
change in cyclical export by 1 unit will increase the cyclical component of GDP by
0.0665891 units.
➢ The slope coefficient of -0.0622682 means that keeping all other variables constant, a
change in cyclical import by 1 unit will decrease the cyclical component of GDP by -
0.0622682 units.
Adjusted R2 = 0.6506 claims that along the computed regression line, adjusted for the degrees of
freedom, the fluctuation of the cyclical components of consumption, investment, government
expenditure, export, and import can be used to explain 65.06% of the variance in the cyclical
component of real GDP.
Hypothesis Testing
The null and alternative hypothesis for the coefficients of cyclical components of consumption,
investment, government expenditure, export, and import are as follows: -
𝐻0: 𝛽1 = 0 There is no relation between the cyclical component of consumption, 𝑋1 and business
cycle, Y.
𝐻1: 𝛽1 ≠ 0 There is a relation between the cyclical component of consumption, 𝑋1 and business
cycle, Y.
𝐻0: 𝛽2 = 0 There is no relation between the cyclical component of investment, 𝑋2 and business
cycle, Y
𝐻1: 𝛽2 ≠ 0 There is a relation between the cyclical component of investment, 𝑋2 and business
cycle, Y.
𝐻0: 𝛽3 = 0 There is no relation between the cyclical component of government expenditure, 𝑋3 and
business cycle, Y.
𝐻1: 𝛽3 ≠ 0 There is a relation between the cyclical component of government expenditure, 𝑋3 and
business cycle, Y.
𝐻0: 𝛽4 = 0 There is no relation between the cyclical component of export, 𝑋4, and business cycle,
Y.
𝐻1: 𝛽4 ≠ 0 There is a relation between the cyclical component of export, 𝑋4 and business cycle, Y.
𝐻0: 𝛽5 = 0 There is no relation between the cyclical component of import, 𝑋5, and business cycle,
Y.
𝐻1: 𝛽5 ≠ 0 There is a relation between the cyclical component of import, 𝑋5 and business cycle,
Y.
The t-test (Test of Individual Significance):
df= n-1=41-1= 40
The slope coefficient is statistically significant if |𝑡| ≥ 2.021. T-stat is greater than 2.021 for the
slope coefficient of the cyclical component of consumption, which is 4.55. As a result, we reject
the null hypothesis H0. Therefore, the consumption cycle's cyclical component is statistically
significant. T-stat 4.55, which is more than 2.021, indicates that the cyclical component of the
investment's slope coefficient is positive. As a result, the investment's cyclical component is
statistically significant. The cyclical portion of government spending has a t-stat of 0.09, which is
below 2.021. Therefore, we fail to reject the null hypothesis H0. The government's cyclical
component is thus statistically insignificant. T-stat is 4.73 for the cyclical portion of export, which
is greater than the t-critical, so we reject H0. Therefore, the export's cyclical component is
statistically significant. Since the cyclical import component has a t-stat of 5.23, it is statistically
significant.
The periodic pattern of expansion (growth) and contraction (recession) in an economy over a
period can be referred to business cycle fluctuation. There is no doubt that macroeconomic
indicators such as GDP, consumption, investment, government expenditure, export, and import are
the key characters in such fluctuations, but there exist few alternative explanations which can
impact the business cycle as much if not more. In this section of our report, we have highlighted a
few factors that have contributed to some of Bangladesh's most significant business cycle moves
over the reference period of 1981–2022.
Conclusion
The data show that Bangladesh has had significant economic growth since 1981. Real GDP,
consumption, investment, government spending, and export data—all of which have increased
over the past 41 years—reflect this. From our analysis we have gathered that the country's
persistent negative net export is the sole serious problem. In order to achieve a more favorable
export-import relationship Bangladesh can employ several strategies such as export
diversification, improve trade agreement and regional integration, allow access to trade financing
particularly to small and medium sized enterprises (SMEs), etc. It is crucial to remember that
dealing with a persistently negative net export necessitates an all-encompassing strategy. The
application of these measures, along with efficient policy coordination, stakeholder involvement,
and ongoing monitoring, can promote Bangladesh's sustainable economic development and
improve its trading position.
References
BBC News. (2019, February 26). Bangladesh profile - Timeline. Retrieved from BBC News:
https://www.bbc.com/news/world-south-asia-12651483
Johnson, D. P. (2005, July 15). Political business cycle. Retrieved from A Glossary of Political
Economy Terms, Auburn University:
http://webhome.auburn.edu/~johnspm/gloss/political_business_cycle.phtml
Ministry of Food & Disaster Management Bangladesh. (2010, April). National Plan for Disaster
Management. Retrieved from
https://ddm.portal.gov.bd/sites/default/files/files/ddm.portal.gov.bd/page/332124ba_20b1
_42cc_816b_d97d7eb4f478/npdm_final.pdf
Syed Ershad Ahmed. (2022, July 27). Growth through automation and technological innovation.
Retrieved from The Financial Express:
https://thefinancialexpress.com.bd/views/views/growth-through-automation-and-
technological-innovation-1658849287
The World Bank. (2021, April 12). Bangladesh Economy Shows Early Signs of Recovery Amid
Uncertainties. Retrieved from The World Bank:
https://www.worldbank.org/en/news/press-release/2021/04/12/bangladesh-economy-
shows-early-signs-of-recovery-amid-uncertainties
Appendix