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Rational thinking – key to economic analyses

We daily come across people making over-generalizations as to various economic factors. You daily encounter people saying that Pakistan’s economy is in doldrums and is about to sink or Pakistan’s economy is blooming like anything. Someone, sometimes, might have considered the actual economic figures before making such comments, while majority views are just to praise or disapprove the government policies based on their political affiliations. Being a citizen of Pakistan, everybody has the right to applause or criticize the government policies including economic policies, nonetheless such analyses should essentially be based on some solid economic indicators/figures and logical analyses of those factors.

As the interest of our youth has deepened into the politics and social media have provided them a platform to praise and criticize the policies of the government, they should do it in a more rational way based on some data. In this article, I have tried to point out various economic indicators; those should be considered while making comments as to the health of the state economy.

The best quantitative way is to compare some measurable variables of the economy over a certain period. Relating various economic factors to Gross Domestic Product (GDP) is the easiest and the most reliable measure to do so. Various economic factors can be considered in this regard and be compared to GDP to reflect on the economic health of the country. I recommend at least considering following five economic indicators to make your assessment more authentic and quantifiable:

  • GDP and its growth: In its simplest form, Gross Domestic Product (GDP) is universally accepted quantitative measure of the country’s economy. GDP represents the monetary value of all the goods and services produced within the geographic borders of a country over a specified period. Check the size of the GDP and its growth over a certain period to get an idea of the economic conditions. A good GDP growth rate suggests better economic activity and economic well-being of the people.
  • Debt to GDP ratio: Once you know the GDP, it would be easy to compare it with various factors. Start with debt. The size of the debt shows how much you have borrowed to run the economy of your country. The debt might have increased but the important decisive factor is debts ratio to country’s GDP. To determine debt’s effect on the economy see whether debt to GDP ratio has increased, decreased or remained the same. Increase in debt to GDP ratio can be matter of concern and reflects poor on the overall economic health of the country.
  • Tax to GDP ratio: This shows the ratio of tax collected as compared to the GDP. High tax to GDP ratio means a good availability of funds for the governments to provide services to its common people and carry on developmental projects. This also helps to overcome deficiencies in the budget. Moreover, high tax to GDP ratio reflects formally organized economy with less income inequality in the society.
  • Trade Deficit: When the monetary value of the imports by a country is more than that of exports, the result is trade deficit. Trade deficit can result in shortage of foreign currency in the country and can have negative impact on the value of local currency. High trade deficit, therefore, is a negative economic indicator.
  • Foreign Currency reserves: These are foreign currencies held by State Bank of Pakistan so that country can pay its liabilities, if need be. Forex reserves are also critical to support import and export of the country. Without its ability to trade in the global markets, the country cannot take benefit of the global economic growth and its prospects of developing strong economy would fade away. Therefore, the size of the forex reserves is an important indicator of the prevailing economic condition.

 

Though considering the above economic indicators is an effective guide to make your analyses valid and reliable, but just considering the above factors is not enough. Even apparently, a week economic indicator can have a long-term positive justification. For example, a cursory view of our current trade deficit may indicate an alarming gap in imports and exports, however, detailed analyses may suggest that this gap has increased due to heavy imports of machinery etc caused by triggering of the economy by CPEC and related infrastructure projects. So one have to weigh all the related economic factors while analyzing the economy.

Being able to identify and analyze the economic data as mentioned above is a must and be taken as the minimum intellectual effort one should expect from all the people evaluating and commenting upon the economic policies. Developing the habit of searching for the data and then comparing it on some rational logical ground make some comments would provide an academic arena to develop intellectual muscles especially to the youth. This exercise would help the youth to be more pragmatic and would not only sharpen their analytical skills but also help them to take the challenges of their practical life and career more realistically and upfront.

Perceptions are though stronger than realities but youth, being foundation stone of our future, owe a responsibility to ensure that perceptions are not carried away by sheer propaganda and realities do have their part in shaping perceptions. Moreover, we should be able to sieve out realities from the propaganda. We can ensure this by developing and imparting a habit of rational thinking. Exercising the points mentioned above would definitely sharpen rational thinking helping to make valid analyses.

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