Investment And Gross Domestic Product

Published Date: 02 Nov 2017

Investment is an important component in aggregate demand and its also play an important role to determine the equilibrium level of nation income and the corresponding level of employment.

According to the Keynesian theory of income and employment that investment is taken in the sense of real investment rather than financial investment. Its mean that we do not just purchase of existing bonds, debenture or equity shares, but the purchase of new machine, plants and equipment as well. Investment is defined as an addition to existing stock of real capital by increasing the productive capacity in the economy. It means that the investment as an expenditure increase the supply of real capital by increasing the level of employment and level of real national income. On one hand investment creates capital goods and generates income on the other hand.

There is two types of investment: 1 (induced investment) 2 (autonomous investment)

Induced investment may be defined as the investment which is made in response to the inducement given by the expectation of profit.

Autonomous investment is not influenced by such factor as the rate of interest, internal rate of return and level of national income.

In Investment has different meanings in finance and economics.

In economics, the investment is related to saving and deferring consumption. It involved many areas of the economy, such as business and finance management whether for firms, household, or governments.

In finance, basically the money is putting something with some expectation of gain, over a longer term not short term. Its may be or may not be backed by analysis and research. Its also involves some form of risk such as investment in equities, property and even fixed interest securities.

In Pakistan, there are so many investor who invest money in bank, organization and stock exchange. They can invest for a longer time, the foreigner cannot invest their money in Pakistan because there is no safety in Pakistan 20% foreigner investor can invest their money, and 80% cannot invest their money so that’s why Pakistan cannot improve their investment. Inflation rate were high, GDP per capita is going down and the budged is also in deficit and they were taking loan for other Countries. So that’s why the investment rate were low In Pakistan.

Gross domestic product (GDP) is refer to the total market value of all final goods and services produced within a country in a given period of time. GDP per capita is considered an indicator of a country's standard of living; GDP per capita is not a measure of personal income. In economic theory, GDP per capita equals to the gross domestic income (GDI) per capita.

You probably hear that, "you cannot compare car with bike" yet GDP dose exactly that. GDP adds together many different kinds of product that they measure single value of economic activity. Its also include market price, because market price measures how many people are willing to pay for different goods, that reflect the value of those good.

GDP includes good and services currently produced, it cannot include transaction item produced in the past. For example when Ahmed produces and sell a new car, the value of car is include in GDP but when one person sell a used car to other person, the value of the used car is not include in GDP.

GDP can be determined in three ways. They are the product method, the income method, and the expenditure method.

The most direct of the three is the product method, the product method measures national income as the sum of net products produced by the production unit in the given period. The expenditure method measures national income at the disposition stage. There is three institutional sectors they are the household sector, the business sector and government sector. The income method measures national income as the sum total of factor income shares accruing to factor owners. The factor of production is land, labour, capital, entrepreneurship.

In Pakistan, GDP rate is cheaper because here export is less and import good at high level because of this our country is dependent on foreign aids. Our exports is 38% and import is 62% so it is a sign for inflation. Inflation rate in Pakistan is 22% higher than other countries. In 2005, the former president of Pakistan praveez mushraf’s presidency the inflation rate was 15% and now in 2013 the president of Pakistan Asif Ali Zardari’s presidency the inflation rate is increased by 7% because of this GDP rate is decreased in Pakistan.

Literature review

Many economics has defined that the economics activities of all the finals goods and services produced in current year are dependent on the activities of the investments of the individuals. In short the rate of gross domestic product is dependent on investment .according to the work of Feldstein and Horioka (1980), the debate over the correlation between saving and investment has been initiated for the gross domestic product. The investment is the part of the economics business cycle.

According to the author (Richard K. Green,2009). It examines on the outcome of different kind of investments on the business cycle. particularly, it examine whether housing and non-housing investment Granger(a person who operates a farm ) cause GDP, and whether GDP Granger cause each of these types of investments.

Goher Fatima (2011) according to the author, Economics growth indirectly or directly is dependent on the possible consequences of fiscal deficit. Fiscal deficit affects economic growth of country very adversely. According to the report of the Gohar Fatima (2011), In case of Pakistan, country is facing this adverse situation of fiscal deficit from last many decades. There are many reasons behind this. First of all it is evident from economic history that process of revenue generation i.e. tax collection is very poor. The ratio of indict tax is higher than direct tax and more than half population is not paying tax which is only source of revenue generation. The tax GDP ratio stood at around 11.5 % during last several years.

It also dependent variable is INV. The results showed indirect impact of fiscal

deficit on Y through INV. INV affects Y and PG positively and significantly. The other

independent variables have negative and significant impact on INV which ultimately affects GDP per capita. Pakistan is facing high inflation rate from last many years and fiscal deficit is

one of the reason of this problems.

Aisen and Hauner (2008) found with the help of data from (1970-2006) of sixty advanced and states including emerging states, by using reduced form equation. Results of baseline showed that the coefficient is highly significant, as 1% increase in deficit increase the interest rate by 44 points. The result of overall countries showed that budget deficit have negative effect on interest rate during (1985-1994), but effect is positive after 1995. Over all conclusion divided into three portions firstly budget deficit have positive effect on interest rate, secondly this effect varied from country to country, and thirdly effect depend on interaction terms.

Ahmed et al (1998) stated that due to inefficient and unsuccessful revenue generation

policies, Pakistan is facing highest fiscal deficit. They further argued that inherently structural problems in tax system of Pakistan are one of the biggest reasons of fiscal deficit. Lozano (2008) collected quarterly data of last 25 years (1983-2007) and using vector error correction (VEC) model explored a mixed relationship of inflation and money growths with fiscal deficit.