Monday, August 03, 2009

Sustainability of GDP

Oftentimes it is considered that a growing GDP is a panacea. We (at least yours truly) have believed that an increased Government spending and investment in infrastructure will ‘always’ lead to growth in GDP and hence it contributes towards the panacea for all economic frailties. But as this article from ‘The Economist’ conveys, the constituents of GDP will be an important factor in deciding whether or not the increased investments will have sustainable impact on GDP.

Let me try to give a brief summary of the above article:
GDP = Consumer Spending + Government Spending + Investments + (Exports – Imports)
Further breaking down, GDP = (Household Spending + Corporate Spending) + Government Spending + Investments + (Exports – Imports)

If growth in GDP is not accompanied by growth in Household Spending, that growth in GDP would be short term and would not be sustainable in the long run. Hence for a sustainable and long term growth in GDP, the Governments should target increasing contribution of Household Spending to GDP.

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