Macroeconomic Indicators of Nepal: [5 Indicator Analysis]

1.1. Introduction

The macroeconomic indicators of the country are the basic economic indicators that evince the aggregate economic scenario of the nation. Every nation publishes the annual macroeconomic indicators; investors, government bodies, NGOs, INGOs, and other international bodies are keen towards the macroeconomic indicators of the nation. GDP at constant prices, GDP at current prices, Per Capita Income, Gross Domestic Saving, Gross National Saving, Gross Fixed Capital Formation, Gross Domestic Capital Formation, Compensation to employees, and myriad other indicators are studies under macroeconomic indicators.

Though Nepal Rastra Bank has published the annual macroeconomic scenario with 18 macroeconomic indicators, this study only focuses on the major five macroeconomic indicators, namely, Real GDP, Nominal GDP, Gross National Saving, Gross Fixed Capital Formation, and Gross Domestic Capital Formation.

• GDP at Constant Price

GDP at Constant Price is the inflation-adjusted monetary value of goods and/ or services produced within the political boundary of a nation regardless of factors of production. GDP at Constant Price is often referred to as Real GDP, Constant Price GDP, Inflation-corrected GDP or Constant dollar GDP. Economists prefer real GDP to nominal GDP as the real GDP is unaffected by changes in price; hence, the real GDP is calculated the monetary value of goods and/or services with respect to the base year’s price. Therefore, GDP at Constant Price reveals the actual change in national output over time.

• GDP at Current Price

GDP at Current Price is the monetary value of goods and/or services produced within the political boundary of a nation regardless of factors of production. GDP at Current Price is often referred to as Nominal GDP. Economist’s verdict that nominal GDP provides distorted macroeconomic signals as the nominal GDP is widely affected by inflation and deflation, which conceals the changes in national output. Nominal GDP increases either due to inflation or an increase in national output or both. So, dubiousness prevails while taking nominal GDP into consideration.

• Gross National Saving

Gross national saving is derived by deducting final consumption expenditure from Gross national disposable income, and consists of personal saving, plus business saving, plus government saving, but excludes foreign saving (Central Intelligence Agency, 2018). The figures are presented as a percent of GDP. A negative number indicates that the economy as a whole is spending more income than it produces, thus drawing down national wealth (dissaving).

• Gross Fixed Capital Formation

Gross Fixed Capital Formation is essentially the net investment. It is the component of the expenditure method of calculating GDP. It refers to the net increase in physical assets (investment minus disposals) within the measurement period. It does not account for the consumption (depreciation) of fixed capital, and also does not include land purchases. Gross fixed capital formation is measured by the total value of a producer’s acquisitions, fewer disposals, of fixed assets during the accounting period plus certain additions to the value of non-produced assets (such as land or subsoil assets) realized by the productive activity of institutional units.

• Gross Domestic Capital Formation

Gross capital formation is measured by the total value of the gross fixed capital formation, changes in inventories and acquisitions fewer disposals of valuables for a unit or sector. All types of construction; pakki and Kachchi (concrete and non-concrete) are covered in the estimates. For the estimates of machinery and equipment value, imports of machinery and equipment and domestic production are used.

2.1. Data Presentation

2.1.1.      Macroeconomic indicators of Nepal

Nepal Rasta Bank has used 18 macroeconomic variables in assessing the behavior of macroeconomic indicators of Nepal; nevertheless, the study only focuses on the major 5 macroeconomic variables.

Table 2.1

Macroeconomic indicators of Nepal

In million rupees
Indicators	2011/12	2012/13	2013/14	2014/15	2015/16	2016/17
GDP at the current price	1527344	1695011	1964540	2130150	2247427	2599234
GDP at constant price	670279	697954	739754	764336	767492	825049
Gross National Saving	602868	689662	898479	940302	898098	1137936
Gross Fixed Capital Formation (GFCF)	307384	359854	462013	595823	647294	878605
Gross domestic capital formation (GDCF)	526889	632601	808758	831983	757680	1104962

Source: Macroeconomic Indicators of Nepal, Nepal Rastra Bank

Table 2.1 depicts the major five macroeconomic indicators of Nepal. The table presents the six-year data ranging from 2011/12 to 2016/17 relating to GDP at the current price, GDP at a constant price, Gross National Saving, GFCF, and GDCF.

Figure 2.1: Nominal GDP and Real GDP

Figure 2.1 depicts the Nominal GDP and Real GDP. Nominal GDP is increasing in each successive study years. On other hands, Real GDP is more or less constant over the study years, which means national output is almost constant in the study years. Interestingly, the study displays that rise in Nominal GDP is due to an increase in prices.

2.1.2.      Saving and Investment of Nepalese Economy

Saving is the amount of income forgone from being consumed. It is the sacrifice of the present consumption.

Investopedia (2018) defines “Savings, according to Keynesian economics, are what a person has left over when the cost of his or her consumer expenditure is subtracted from the amount of disposable income earned in a given period of time.”

On other hands, investment is the purchase of goods or acquiring knowledge and skills that are not consumed or exhibited today but are used in the future to generate wealth.

The investment is one of the indispensable components of the expenditure method of calculating GDP. Investment can be classified into Gross Fixed Capital Formation and net changes in stock. Gross Fixed Capital Formation is fundamentally the net investment. In order to attain the sustained growth in Gross Domestic Product, the net investment must be at least 20 percent of GDP.

Table 2.2

Saving and Investment of Nepalese Economy

Year	GNS (%)	GFCF (%)
2011/12	39.47%	20.13%
2012/13	40.69%	21.23%
2013/14	45.73%	23.52%
2014/15	44.14%	27.97%
2015/16	39.96%	28.80%
2016/17	43.78%	33.80%

Source: Macroeconomic Indicators of Nepal, Nepal Rastra Bank

Figure 2.2: Saving and Investment of Nepalese Economy

Figure 2.2 depicts the saving and investment of the Nepalese economy. Gross National Saving is higher than Gross Fixed Capital Formation in the entire study years. The gap between GNS and GFCF is decreasing in late years in comparison to the initial study years. However, the investment exceeds 20 percent of GDP in the entire study years.

2.2.         Data Analysis

2.2.1.      Analysis of Growth of Nominal and Real GDP, and inflation

Analysis of growth of Nominal and Real GDP aims to display the annual rate of changes in nominal and real GDP, and their pattern of growth over the study years. Inflation is the rise in the general price level. The discrepancy between nominal and real GDP determines the inflation rate. The widening of the gap between Nominal and Real GDP signifies that the price level is hiking and narrowing of the gap between them signifies shrinking price level.

Table 2.3

Analysis of Growth of Nominal and Real GDP

Year	% change in nominal GDP	% change in real GDP	Nominal to Real GDP	Inflation Rate
2011/12	-	-	2.28	-
2012/13	10.98%	4.13%	2.43	6.58%
2013/14	15.90%	5.99%	2.66	9.35%
2014/15	8.43%	3.32%	2.79	4.94%
2015/16	5.51%	0.41%	2.93	5.07%
2016/17	15.65%	7.50%	3.15	7.59%

Source: Macroeconomic Indicators of Nepal, Nepal Rastra Bank

Figure 2.3: Analysis of Growth of Nominal and Real GDP

Figure 2.3 displays the annual percentage change in nominal GDP and real GDP, and the inflation rate. The changes in nominal GDP is higher in the entire study years and is more volatile, while real GDP exhibits more or less consistent pattern over the study years. Both nominal and real GDP sharply fell in 2015/16 due to massive earthquake followed by an unofficial embargo by India. The inflation rate is consistent over the study years; however, inflation of 4 – 5 percent is considered desirable for an economy.

2.2.2.      Analysis of Saving and Investment

The Keynesian closed economic model explains that the equilibrium in the economy prevails when saving in an economy equals to the investment. The economy is in equilibrium when aggregate demand equals aggregate supply.

The derivation of Keynesian Multiplier vividly presents the saving-investment equality such that

Y=C+I

Y+∆Y=C+∆C+I+∆I

Y+∆Y=Y+(∆C+∆I)

∆Y=∆C+∆I

∴∆S=∆I [∆Y-∆C=∆S]

The economy experiences investment greater than saving in case of aggregate demand greater than aggregate supply. Hence, the economy experiences increase in national output. Conversely, when saving greater than investment, the economy experiences decrease in national output.

The concept can be explained in light of the paradox of thrift. The notion of the paradox of thrift is that as individuals tend to save the increasingly larger part of their income, they will become poorer instead of being richer. Hence, saving is a vice.

According to Keynesian theory,

If Investment (I) > Saving (S), then national income increases until I = S.

If Investment (I) < Saving (S), then national income decreases until I = S.

Table 2.4

Change in GNS and GFCF, and Saving – Investment gap

Indicators	Gross National Saving (GNS)	Gross Fixed Capital Formation (GFCF)	% change in GNS	% change in GFCF	Saving-Investment gap*
2011/12	602868	307384	–	–	19.35%
2012/13	689661	359854	14.40%	17.07%	19.46%
2013/14	898479	462013	30.28%	28.39%	22.22%
2014/15	940302	595823	4.65%	28.96%	16.17%
2015/16	898098	647294	-4.49%	8.64%	11.16%
2016/17	1137935	878605	26.71%	35.74%	9.98%

Source: Macroeconomic Indicators of Nepal, Nepal Rastra Bank

Note:

*Saving – Investment gap = GNS (% of GDP) – GCFC (% of GDP)

Table 2.4 depicts the percentage change in GNS and GFCF, and Saving – Investment gap. GNS and GFCF are moving in the same direction except in 2015/16 due to unpredicted natural calamity and unofficial sanction by India. Despite sudden fall in GNS in 2015/16, the GFCF has not suffered a huge downfall. In 2016/17, both GNS and GFCF experience a huge increase. The saving-investment gap in the Nepalese economy is narrowing. The gap was wide in 2011/12 to 2013/14, but it is decreasing since 2014/15.

The Keynesian view on the saving-investment gap is not applicable in the Nepalese economy while having a superficial analysis. The real GDP and Saving – Investment gap GNS is greater than GFCF over the entire study years, which suggests that aggregate supply is greater than aggregate demand and directs the decrease in national income or GDP. However, the real GDP is experiencing growth over the entire study years with an average growth rate of 4.27%. However, the appropriate judgment of their relationship can be done with the help of time series data and correlational analysis.

2.2.3.      Analysis of Uniformity

Analysis of uniformity demonstrates the fluctuations in the economic indicators over the study period. Uniformity is desirable in an economy as an economy with high fluctuations is prone to economic shocks.

Table 2.5

Analysis of Uniformity

Indicators	GDP at the current price	GDP at constant price	Gross National Saving	Gross Fixed Capital Formation	Gross domestic capital formation
2011/12	1527344	670279	602868	307384	526889
2012/13	1695011	697954	689662	359854	632601
2013/14	1964540	739754	898479	462013	808758
2014/15	2130150	764336	940302	595823	831983
2015/16	2247427	767492	898098	647294	757680
2016/17	2599234	825049	1137936	878605	1104962
Mean	2027284	744144	861224	541829	777145
SD	353660.22	50178.50	174045.84	192313.22	180448.67
CV	17.45%	6.74%	20.21%	35.49%	23.22%

Source: Macroeconomic Indicators of Nepal, Nepal Rastra Bank

Table 2.5 depicts the uniformity of economic indicators over the study years. GDP at a constant price is most uniform amongst the economic indicators with a coefficient of variation of 6.74 percent. GDP at current prices has many fluctuations in comparison to real GDP due to price volatility. Likewise, GNS, GFCF, and GDCF have also experienced less uniformity over the study period.

Conclusion

Nepal is one of the least developed nations in the world. The growth in real GDP is not satisfactory; however, the economy is making progress in increasing the real GDP in 2016/17. Fiscal year 2015/16 was an absolute disaster with real GDP of a mere 0.41 percent. The nominal GDP is experiencing the growth equivalent to thrice of real GDP due to inflationary pressures. Further, the study reveals that Gross National Saving is higher than Gross Fixed Capital Formation over the entire study years.

The coefficient of variation depicts that real GDP exhibits uniformity while other indicators are fluctuating over the study years. The correlational analysis of economic indicators evinces that all the macroeconomic indicators have a high positive correlation, which reflects that when one of the macroeconomic indicators increases, all other macroeconomic indicators also increases and vice-versa. The correlational analysis of real GDP and saving-investment gap, after nullifying the impact of earthquake and unofficial embargo, is -0.5, which clarifies that as investment increases the gap between saving and investment decreases, and eventually real GDP increases.

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Macroeconomic Indicators of Nepal | Nepal Rastra Bank