Question

Elaborate the components of GDP. Why GDP is considered as the most important indicator of a country’s people wellbeing?

Under the headings of components of GDP components discuss the impact of COVID 19 pandemic crisis on the GDP of Saudi Arabia. Discuss four most important measures taken by the government to overcome the economic crisis caused by COVID 19.

Answer 1

GDP is the total value of goods and services produced in a geographic region measured in monetary terms. It is most accurate measure of real economic progress of a nation. Growth in GDP means growth in total output which is only possible when there is either gain in efficiency or productivity, or there is gain in capital stock, labor or other natural resources of the economy, that is why it is considered as most important indicator of a country's people wellbeing.

When the total GDP is divided into its sub parts or sectors of the economy, we get components of the GDP.

In broad terms, there are mainly four components of GDP:-

( I ) Consumption ( C ) - Sudden closure of businesses due to lockdown of the country has led to sudden fall in employment numbers leading to massive fall in aggregate demand.

( II ) Investment ( I ) - Most of the businesses have been shut down for the last three months leading to fall in revenue and profit. Many firms may go bankrupt. Only fe established and favorably placed firms may invest. Thus, we can say investment has also declined drastically.

( III ) Government Purchases ( G ) - Fall in direct as well as indirect taxes have reduced money with the government. However, government may borrow to provide fiscal stimulus in terms of increase in government spending.

( IV ) Net Exports ( NX ) - Most of the economies have been shut down for the past 3 months leading to unprecedented fall in exports of crude oil and other goods of the economy.

The four most important measures taken by the government to overcome the economic crisis caused by COVID 19 are as follows:-

( I )

The Kingdom will bring down government spending, by reducing allowance paid to employees. VAT will be increased from 5% to 15% for this fiscal year. These measures will save the kingdom 100 billion riyals.

( II ) VAT will be increased from 5% to 15% for this fiscal year. These measures will save the kingdom 100 billion riyals.

( III ) The government will peg the domestic currency to US dollar for stability of trade.