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Macroeconomic Environment, Essay Example

Pages: 4

Words: 1020

Essay

Economic Growth

According to the CIA, (2013) Nicaragua is the poorest country in Central America. However, its GDP has kept improving in the past few years in face of increasingly adverse. The GDP decreased sharply from 5.3% in 2007 reaching – 1.45% in 2009. Since 2009, from the studies the GDP continued increasing to reach at 5.1% in 2011 with 3,730.0$ per capita. It is ranked the 92 as compared to the world. This shows a great improvement on economic growth leading to attraction of foreign investment.

Nicaragua acquires its economic power from the agriculture sector. In addition, the improvement of the gross domestic product (GDP) is because of attracting more foreign investment (FDI). In 2011, Nicaragua attracted a total of US$968 million of FDI, growing 90.5% compared to 2010. This improvement led by the energy, telecommunications and free zones sectors, which together accounted for 52% of total FDI (Country Monitor, 2006).

On the other hand, Pakistan has experienced fluctuated economic growth over the past decades. The growth rate of real GDP as shown in graph one decreased from 8.96% in 2005 reaching 5.82% in 2006 before increased to 6.81% in 2007. In 2008, it is also decreased sharply to 3.68% and continued decreasing to reach at 1.7% in 2009. From 2009 to 2012, the GDP growth slowly reaching at 3.67% (Trade economic, 2013). The graph shows that the economic growth of Pakistan is not stable. This makes foreign investors to shy away from investing in Pakistan.

Afridi, (2012) mentioned that the GDP growth rate of Pakistan is the lowest in South Asia at 3.7%. He also mentioned that there is simply no analysis as to why Pakistan is lagging behind in the region. Rise in oil prices and Euro zone crisis are equally affecting all the countries of the region. He believes that the FDI is the power for upward economic trend of any economy. It is noteworthy that the FDI in Pakistan for the period July-April 2011-12 decreased to $668 Million compared to $1293 Million last year the same period. He stated clearly that the government should strive to decrease fiscal deficit of 4.1%. Instead, the deficit has increased to 7.6%. As from the graph, there is large economic growth in Nicaragua than Pakistan. This is because stable economy brought by foreign investors. This makes foreign investors to prefer Nicaragua than Pakistan.

Unemployment and Inflation

In Nicaragua, unemployment rate has slightly increased from 7.3% in 2011 to 7.4% in 2012. This has ranked it 83 in the unemployment rate in the world. However, the unemployment rate was higher in the past few years. In 2009, the rate was 8.2% and 8% in 2010. On the other hand, the inflation rate has decreased to 7.43% in 2012 from 8.1% in 2010 (CIA, Nicaragua, 2012). The improvement of the rate compared to the last year refers to increasing the FDI in Nicaragua. Unemployment represents one of the central concerns for governments. The in unemployment rate and the equality of income distribution in Nicaragua will enhance the income stability. This will increase the number of consumers and their income that positively influence the demand of goods.

Pakistan’s unemployment rate has sharply fallen down to 5.6% in 2012 from 15% in 2010. It has ranked it 55 compared to other countries (CIA, Pakistan, 2013). This is because of the economic growth that created more jobs. This increase in the unemployment rate increases the inequality of family income penalties. On the other hand, the inflation rate has slightly decreased to 11.3% in 2012 from 11.9% in 2010 (CIA, Pakistan, 2013).

The extreme decline in the unemployment rate will establish social and economic stability in Pakistan and increase the investment. This will only be enhanced if Pakistan managed the high inflation rate well.

 

Exchange Rate

The factors driving FDI inflows have responded the impact that would be anticipated a priori to result from the local-currency appreciation occurring in the country. In countries seeking FDI, high commodity prices have counterbalanced the negative effects of exchange rate appreciation. This has created motivations for new investments (Bárcena, et. al., 2010).

Currency exchange rate is important for industries that have international trade in terms of import and export goods.  Appreciation of currency means its value increases relative to the value of other countries’ currencies.

The currency of Nicaragua is cordobas (NIO), and it has depreciated against US dollar from NIO 20.43/1US in 2009 to NIO 22.42/1US and NIO 23.58/1US in 2011 and 2012 respectively (CIA, Nicaragua, 2013).  NIO exchange rate has depreciated; that increases the costs of the imported goods and might decrease the business profits.

In Pakistan, the used currency is Pakistani rupees (PKR) and it has also depreciated against US dollar from PKR81.71/1US in 2009 to PKR86.34/1US and PKR95.1/1US in 2011 and 2012 respectively (CIA, Pakistan, 2013).  The strong declined in PKR exchange rate will create a downward margin pressure on the investment that will hurt by the increased importing costs.

Degree of Liberalization Trade

Since its last review in 2006, Nicaragua has continued to make good progress in promoting economic integration as well as free trade. The promoting liberalization trade can be done by opening markets, stimulating local production and promoting national efficiency, diversification, and competitiveness. Nicaragua also received outstanding recognition for promoting trade diversification regional trading blocs and other countries globally (Rogers, 2012). The trade liberalization in Pakistan still needs to be improved. Shaheen, et. al., (2012) mentioned that Pakistan should focus more the trade liberalization in order to improve its economy.

Comparison from the economic environment perspective

In term of the economic growth, Nicaragua shows better improvement with stable increasing in the GDP while Pakistan has unstable and fluctuated growth. Nicaragua has higher unemployment rate than Pakistan. The higher unemployment rate could be positive by allowing the investors to attract more employees with lower wages. However, this also has a negative impact by decreasing the consumer purchasing power. In term of the exchange rate, both countries experience depreciation in their currency, but Nicaragua is better in the exchange rate factor. In addition, Nicaragua has higher degree of liberalization trade, which attract more investors.  Thus, the economic factors in Nicaragua seem to be more attractive for the investors than Pakistan.

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