LECTURE-19

Economic System of Bangladesh:

Trend and definition of Micro &
Macro Economy, Bangladesh
Economy, GDP, GNP, National Income,
Saving, Investment, Consumption and
Employment

Masuma Akter Shimu

 Economics
• Economics is the study of how individuals and
societies choose to use the scarce resources that
nature and previous generations have provided.
Three basic problems / questions all societies must
decide:
• What commodities should be produced and in what
quantities?
• How shall goods be produced (by whom and with
what resources and in what technical manners to be
produced)?
• For whom shall goods be produced?
 Cont…
• There are two branches of Economics –
Microeconomics and Macroeconomics.
• Microeconomics is the branch of economics
that examines the functioning of individual
industries and the behaviour of individual
decision-making units – that is, business firms
and households.
 Cont…
• Macroeconomics is the branch of economics
that examines the economic behaviour of
aggregates – income, output, employment,
and so on – on a national scale.
Macroeconomics deals with the economy as a
whole.
• Aggregate behaviour refers to the behaviour
of all households and firms together.
 Types of Economy
• Economists generally recognize four types of
Economics Systems namely-
1. Traditional Economy: Traditional Economies rely on
farming and very simple barter trading. Examples
include Neolithic farming villages and the first river
civilizations.
2. Market Economy: A market economy is one in
which individuals and private firms make the major
decisions about production and consumption. Ex-
U.S economy.
 Cont…
3. Command Economy: Command economy is one in
which the govt. Makes all important decisions about
production and distribution. Ex: soviet union.
4. Mixed Economy:It is the combination of both market
and command economy. Ex: Bangladesh economy.
These factors include human resources, natural resources
and capital or money resources. Human needs and wants
also must be balanced within an economic system.
Bangladesh, like most democracies, has a mixed economy.
Most economic decisions are made in the market places.
 Bangladesh Economy
• The economy of Bangladesh is rated as one of
the poorest in the area and most importantly it is
thought to be the least powerful in South Asia.
• The economy of Bangladesh is still attracting
investors from different parts of the world and
there are various national and international
efforts to improve its economic prospects.
• Bangladesh’s per capita income now $1,751, GDP
growth 7.86pc in the FY 2018.
 Cont…
• Half of Bangladeshis are employed in the agriculture
sector. Other goods produced are textiles, jute, fish,
vegetables, fruit, leather and leather goods,
ceramics, ready-made goods etc.
• Exports of textiles and garments are the principal
source of foreign exchange earnings.
• Shipbuilding and pharmaceuticals have become a
major force of growth while the jute sector is re-
arranging with increasing global demand for green
fibres.
 Cont….
• Remittances from Bangladeshis working overseas mainly in
the Middle East, are another major source of foreign
exchange earnings.
• Other important export sectors include ceramics, cement,
fertilizer, construction materials, fish, sea-food and leather
products. Bangladesh has also made major strides in its
human development index.
• The land is devoted mainly to rice and jute cultivation as
well as fruits and other produce, although wheat
production has increased in recent years; the country is
largely self-sufficient in rice production.
 Cont….
• Bangladesh’s growth of its agricultural industries is due to
her fertile deltaic lands which depend on its six seasons
and multiple harvests.
• Transportation, communication, water distribution and
energy infrastructure are rapidly developing. Bangladesh
is limited in its reserve of oil, but recently there has been
huge development in gas and coal mining.
• The country is mainly human resource based, rich
agricultural land, relatively abundant water, and
substantial reserve of natural gas with the blessing of
possessing the world’s only natural sea ports in Mongla
and Chittagong.
 GDP (Gross domestic product)
• GDP is the total market value of all final goods
and services produced within a country in a
given period of time, usually a year or a
quarter (three months).
• Final goods include both tangible goods (food,
clothing, cars) and intangible services
(haircuts, house cleaning, doctor visits etc.).
 GDP and Economic well-being
• GDP is not a perfect measure of the happiness or quality of
life; however it is the best single measure of the economic
well-being of a society.
• Per Capita GDP (measured by dividing real GDP by population)
calculation may be a better measure of the standard of living.
• For comparing standards of living between citizens of a
country and citizens of different countries depends on per
capita GDP.
• Higher per capita GDP indicates a higher standard of living.
However, the measurement of per capita GDP suffers from
fallacious composition of income.
 Trend of GDP in Bangladesh
• The GDP growth was7.86% in FY2017-18, 7.30% in
FY2016-17, 7.11% in FY2015-16, and 6.55% in
FY2014-15, according to the BBS.
• The per capita income has increased to $1,751 in
FY2017-18 from $1,610 in the previous fiscal year,
according to Bangladesh Bureau of Statistics (BBS).
• In the 2017-18 fiscal year, the contribution of the
agriculture sector to the country’s GDP was 13.82%,
while the industry and services sectors contributed
30.17% and 56%.
 Cont..….
• The government has set a target of 7.8 per
cent GDP growth for the next fiscal year
(2018-19). GDP growth rate will be 7.8 per
cent in FY 2018-19 and inflation will come
down to 5.6 per cent by the end of the fiscal
year, Finance Minister AMA Muhith said in his
Budget Speech 2018-19.
 GNP & National Income
Gross National Product:
• GNP is the market value of all final goods and
services produced by permanent residents of
a nation within a given period of time.
National Income:
• National Income of a country can be defined
as the total market value of all final goods and
services produced in the economy in a year.
Measurement of National Income
Measurement of National Income:
Three methods are uses to measure….
• Expenditure approach
• Factor income approach
• Output approach or, value added approach
 Consumption and Savings
• In the simplest model we can consider, we will
assume that people do one of two things with their
income: they either consume it or they save it.
• So Income = Consumption +Savings.
• In this simple model, it is easy to see the
relationship between income, consumption, and
savings.
• If income goes up then consumption will go up and
savings will go up.
 Concept of Investment
• Investment is the second component of aggregate
expenditure. It plays an important role in the
determination of equilibrium level of national
income and corresponding level of employment.
• When the term ‘investment’ is used in economics,
it refers to the expenditure incurred by individuals
and businesses on the purchase of new plant and
machinery, the building of new houses, factories,
schools, construction of roads, etc.
 Cont…
• In brief, it includes the following kinds of
expenditures.
• Stocks or inventories: The inventories expenditures
incurred by businesses on the purchase of new raw
material, semi finished goods and on stock of
unsold goods are counted as investment.
• Fixed capital: The expenditure made on new plants
and machinery vehicles, houses facilities, etc. are
also included in investment.
 Cont….
• Investment is the real flow of capital
formulation that will produce a stream of
goods and services for future consumption. It
is the flow of spending that adds to physical
stock of capital. In economic theory or in
macroeconomics, investment is the amount
purchased per unit time of goods which are
not consumed but are to be used for future
production.
 Relationship between Savings and
Investment
• The amount of saving a country has is fundamental
to finance new investments that the county may
wish to undertake. Savings are also important as they
benefit the economy and are the long term, help to
give a higher level of life.
• One part of a country’s income goes to consumption
and another part goes to savings. There is a direct
relationship between saving and investment. In every
economy,
• Saving = Investment.
 Concept of Employment
• Employment is measured as the number of adult works
(aged 16 and over) who have jobs. A person is
considered employed if he or she has spent most of
the previous week working at a paid job.
• An employed person is any person 18 years old or
older –
1. Who works for pay, either for someone else or in his
or her own business for 1 or more hours per week,
2. Who has a job but has been temporarily absent, with
our without pay.
 Cont….
• An unemployed person is a person 16 years old or older –
1. Is not working,
2. Is available for work, and
3. Has made specific efforts to find work during the
previous 4 weeks.
A person, who is not looking for work, either because he or
she does not want a job or has given up looking, is not in
the labor force.
• Labor Force = employed + unemployed.
• Population = Labor force + Not in labor force.
• Labor force participation rate = labor force/population.
Different types of Unemployment
• Frictional unemployment:
Frictional unemployment is the portion of
unemployment that is due to the normal working of
the labor market, used to denote short-run job
matching problems.
• Structural unemployment:
Structural unemployment is the portion of
unemployment that is due to changes in the structure
of the economy that result in a significant loss of jobs
in certain industries.
 Cont…
• Cyclical unemployment:
Cyclical unemployment is the increase in
unemployment that occurs during recessions and
depressions. (All firms need few workers.)
• Natural rate of unemployment:
Natural rate of unemployment is the unemployment
that occurs as a normal part of the functioning of the
economy. Sometimes taken as the sum of frictional
unemployment and structural unemployment.
 Cont…
• Technological unemployment:
Technological firms replace workers with
machines. Automation and information
technology.
• Seasonal unemployment:
Seasonal unemployment for part of the year
seasonal variation in demand.
• Voluntary unemployment:
Voluntary workers choose to remain unemployed.
 Cont….
• Regional unemployment:
Regional high unemployment in one area local
concentration of declining industries.
• International unemployment:
International overseas firms replace UK
producers’ high priced / low quality UK goods.
 Cont….
• Discouraged Workers: The discouraged-
worker effect lowers the unemployment rate.
Discouraged workers are people who want to
work but cannot find jobs, grow discouraged,
stop looking for work, thus dropping out of
the ranks of the unemployment and the labor
force.