ECONOMY OF COLOMBIA
Introduction
The well-being of people in any given country is determined by the economic state of the country. This well-being of the people is determined by the Gross Domestic Product (GDP) that a country realizes annually. In economic terms, GDP refers to the monetary value that is attached to the final products of goods and services in a country at a given time. It generally gives an economic snapshot to show economic growth. Ideally, GDP is used to indicate the social living standards of the people in a given country (Khan Academy, 2016). However, the GDP does not give a clear representation of living standards as it leaves behind essential determinants like leisure, education and health levels, activities that are way out of market trends, change in income, technological advancement, and negativity or positivity placed to certain economic products by the customers. Despite, the GDP being a great indicator of social well-being, it is a limited tool when comparing the country’s GDP social well-being due to the fact that it assumes essential negative effects that affect the economic growth of a country (Khan Academy, 2016). To understand this, the essay below demonstrates how Gross Domestic product is not always an indicator of better social well-being of the society. To examine this, the essay will include Colombia economy as an example. In this, the essay will vividly demonstrate how Colombia economy is affected by GINI coefficient, Inflation, GDP distribution by sector, HDI, and trade balances.
Colombia Economy
The Republic of Colombia is often called the “gateway to South America” because it is situated in the northwestern part of the continent where it connects with Central and North America. It is the fourth largest country in South America, with a population of more than 50 million people. Due to the rugged topography and its location close to the Equator, there is a wide range of climates, crops and soils (Conface, 2017). It explains the fact that the Colombian economy is traditionally based on the agricultural sector with coffee and fruit production prevailing the exports of the country. In terms of economic growth, Colombia is ranked at third place with a GDP of $744.7 billion. The economic growth of Colombia is growing at a faster rate, especially during the leadership of the current president Juan Manuel Santos. Today, the development of the Colombian economy is the most dynamic economy among the Latin countries due to the policies that have been enforced and adopted in the country.
One of the economic goals that were set by President Manuel Santos was to attract foreign investors. Logically, foreign investors are linked with bringing new investments, business ideas, foreign currencies that are all aim at improving the economy. President Manuel Santos has created a peaceful environment. A country that is peaceful has high chances of attracting investors. Secondly, the increasing population of Colombia is providing a good local market for products that foreign investors will produce (Conface, 2017). When investors start new companies, more unemployed Colombians will get jobs. As a result, the level of unemployment will be reduced, which is one of the factors that increase economic growth. Similarly, when people are employed, they get paid, and this will increase the total GDP. However, the GDP will include even those who are unemployed, which does not reflect a clear assurance that every Colombian is living a better life. Another policy that has been adopted by President Santos has been recovering Colombian territories from drug traffickers and armies. Due to the agricultural productivity of the country, these lands can be used for the production of more goods and services. Therefore, Colombia is on the right track to promote its economic growth.
All these economic strategies will definitely place Colombia in a better economic status. As a result, the GDP of the country will as well improve. This can indicate that Colombia people have better living conditions. However, based on the World Bank statistics, this might not be the real reflection;
Gini Coefficient
In almost if not all economies of world countries, there is a disparity on how income and wealth are being distributed. There are those people with higher annual income and wealth, and other will moderate, others with small, and others who do not have and depend on government relief food. To measure economic distribution with an economy is measure by Gini index or coefficient. The measure was developed by great Italian statistician Corrado Gini in 1912 (Gini, 1921). The measure shows the inequality, wealth distribution within a population. Similarly, Colombia has an equal distribution of income and wealth, as indicated by World Bank estimates. As of 2017, the total Gini coefficient of Colombia was reported to be 49.70 (World Bank, 2018). To measure inequality in the economy using Gini measure, Lorenzo curve is plotted against cumulative percentages of total income starting with the poorest respondent moving to the richest. Gini coefficient measures the area existing between the Lorenzo curve. A Gini coefficient of 0 shows perfect equality, while a coefficient of 100 shows a perfect inequality.
Year Value
1992 51.50
1996 56.90
1999 58.70
2000 58.70
2001 57.20
2002 55.80
2003 53.40
2004 54.80
2005 53.70
2008 55.50
2009 54.40
2010 54.70
2011 53.50
2012 52.70
2013 52.80
2014 52.70
2015 51.10
2016 50.80
2017 49.70
The graph above shows the Gini coefficient from 1992 to 2017 as the confirmed data from the World Bank. It generally shows the poverty level of a country. From the graph, the Gini index is above zero, which is 49.70. This means that income and wealth are not distributed equally among the Colombian population: there those who are extremely poor and others who live by chances. The GDP of Colombia is 375 billion as per 2019 results. To determine the living standards of people, we divide the GDP with the total population. Therefore, the standard of living in Colombia will be given by (375 billion/50 million) = 6, 667.79 US dollar. This implies that every household contributes 6,667.79 to the GDP, which is not true due to disparity in income distribution. Therefore, the rich might have boosted the GDP per capita. Thus, GDP cannot be used to show the standards of living in Colombia.
Inflation
Time to time, the prices of the product may decrease or increase depending on the economic environment. When the price decreases, it is defined as depression and when the prices increases are referred to as inflation. Basically, inflation refers to an increase in the price of goods or services with the currency value remaining the same. This means that the currency will be able to purchase less goods or services than it used to before inflation. Most countries suffer from frequent inflation in the economy. Colombia frequently suffers from price inflation. According to the World Bank (2018) statistics, the price inflation of Colombia was 3.7% (World Bank, 2018). Consumer Index Price goes hand in hand with the distribution of income and wealth as well as the GDP. When the price of products increase, more people compete to buy limited goods and services. When the price increase, people will still purchase basic need to keep them going. This may be confused with increased living standards.
Employment is the source of income for many people that contribute largely to GDP. However, during inflation, the rate of unemployment decreases while inflation rises. More employers are willing to hire more workers at a higher salary as the price of the products they are manufacturing will also command high prices in the market. As a result, the GDP will increase immensely Lumen, 2017). When this GDP during inflation is used to measure living standards, wrong conclusions can easily be made. When the salary increases, the prices of products also increase. Therefore, the disparity in the economy still exists with the rich contributing more in the calculation of GDP. Hence, GDP cannot be used as a measure of living standards in Colombia.
GDP Distribution by Sector
The economic development has main sectors that contribute to the overall growth of the economy. For example, an economy can be supported by agriculture, manufacturing industries, services industry, and technology, among others. Each sector has a respective amount that it contributes to the overall economy and especially on gross domestic product. Colombia economy has three main sectors. Agriculture, Industry, and services sectors. According to Colombian economic statistics, 2018 alone show each sector contribute different figures to the total GDP of the country. The gross domestic product from agriculture was 6.28%, industries contributed 26.67%, while services sector contributed the highest per cent of 57.73% (World Bank, 2018). As shown above, each sector has a different representation of gross domestic income. But this disparity can be understood where it has originated from. From the Colombia population statistics, 57% of the population are farmers. Therefore, the large percent is concentrated on farming.
From the GDP results given above, it can be understood that most of the poor people in the country depend on agriculture. This translate to the low GDP from this sector. On the other hand, the GDP of both services and industry has a higher GDP meaning there are few people who have high income and wealthy. When determining using this as a measure of living standards, crucial factors will be left behind that are useful in concluding that society is living on better standards or not (Kenton, 2019). Therefore, GDP is erroneous when measuring the living standards of Colombians. This is because different sectors of the economy are occupied by a population with differing income and wealth status. Thus, one sector may be mistaken to be richest but in a real sense, is poor.
Human Development Index
Human Development Index is a measure that is used to determine the average achievement of an individual. Ideally, HDI measures the economic welfare contributed by an individual in the overall economic development of a country that is measured in terms of income levels, education, and life expectancy. Human development index and gross domestic product works have a great emphasis on the development of individuals. Human development plays a great deal in economy measure informs of health and education (World Bank, 2018). A high rate of Human Development Index means that the population of the country is economically stable.
In Colombia, the Human Development Index in 2018 is 0.761, which puts the country in a very development category. The GDP of a country relates to life expectancy, health, and education of the people. The more people are educated, their health, and the number of years they live increase their period to work and contribute to economic development. This is enabled in the following ways; Firstly, education is a source of technology that can give new innovations that can promote economic growth. Secondly, life expectancy is the number of years that people can live before succumbing to death. Colombia has a life expectancy of 77 years. This means that the population can work for more years which can impact the economy as they earn income (Kenton, 2019). Finally, the health of the society plays a great deal in the economy and overall HDI. Therefore, when the HDI of a country increases, also GDP increases as well. However, not all population is literate, healthy and lives for 77 years. Thus, concluding that GDP can be used as a measure of living standards in Colombia is wrong and even in other countries.
Trade Balance
Trade balance or (Balance of trade) presents the balance between exports and imports of a country. Trade balance can be termed as a trade deficit or trade surplus. A trade deficit occurs when a country imports more products from other countries than it exports. On the other hand, trade surplus occurs when a country exports more than what the country is importing. Exporting is an indication of economic growth. This is because the country has more products that have been used by its population and the remaining sold to other countries. Colombia boasts a 34.9% of the total national Gross domestic product from international trade (bogotapost, 2019). For the last ten years, Colombia has realized five times increase in its income from foreign trade placing the country to 53rd country in the world of exporters as reported by Economy Complexity Index (ECI).
In 2018 alone, Colombia exported a total of $41.8 billion worth of goods increasing by 10.6% from the previous year. Colombia has signed business treaties with heavy economic weights like China and America. Among the goods, it exports to these countries include Crude oil coffee, precious metals, among others. The money receives from these exports help in developing the economy of Colombia. However, Colombia tends to import more than what it exports. After receiving $41.8 billion from exports, Colombia used a total of $51.2 billion to import goods that are not available in the country, including heavy machines and electronics. When calculating the trade balance, Colombia has a deficit of $10.6 billion (bogotapost, 2019).
The GDP may appear to be big, translating that the living standards of the Colombians to be better. However, with critical economic analysis, this will appear to be overrated as the amount spent on imports is more than what has been received from exports. Therefore, GDP cannot be used to measure the living standards of Colombians as there exists no correlation between them.
Conclusion
To sum up, Colombia is among countries whose economy is growing every day, and future growth is also bright due to strategies that have been put forward. An economy that is growing is characterized by a better living condition of society. Similarly, the gross domestic product of the country also increases the gross domestic product of the country as well. There has been a perception that GDP correlates with living standards. That is, an increase in GDP means a better living condition or decrease in GDP means a decrease in living condition. My thesis was that there is no correlation between this two. From the discussion above, I have comprehensively demonstrated this through by discussing inflation, HDI, Trade Balance, distribution between sectors, and Gini coefficient. All these have proved my thesis right. Thus, GDP can be used, but not a perfect tool for showing living standards in society.
References
Bogotapost. (2019, May 28). Market Watch: Top 10 Colombian Exports and Imports. The Bogotá Post. https://thebogotapost.com/market-watch-top-10-colombian-exports-and-imports/38414/
Conface. (2017). Colombia / Economic analysis – Coface. Cofacecentraleurope.Com. https://www.cofacecentraleurope.com/Economic-analysis/Colombia
Gini, C. (1921). Measurement of Inequality of Incomes. The Economic Journal, 31(121), 124. https://doi.org/10.2307/2223319
Kenton, W. (2019). Balance of Trade (BOT). Investopedia. https://www.investopedia.com/terms/b/bot.asp
Khan Academy. (2016). How well the GDP measures the well-being of society. Khan Academy. https://www.khanacademy.org/economics-finance-domain/macroeconomics/macro-economic-indicators-and-the-business-cycle/macro-limitations-of-gdp/a/how-well-gdp-measures-the-well-being-of-society-cnx
Lumen. (2017). GDP and Standard of Living | Macroeconomics. Courses.Lumenlearning.Com. https://courses.lumenlearning.com/wm-macroeconomics/chapter/gdp-and-standard-of-living/