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Factors Affecting Gross Domestic Product of Bangladesh

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IOSR Journal of Economics and Finance (IOSR-JEF)
e-ISSN: 2321-5933, p-ISSN: 2321-5925.Volume 10, Issue 4 Ser. III (Jul. – Aug 2019), PP 66-70
www.iosrjournals.org

Factors Affecting Gross Domestic Product of Bangladesh

Md. Shahajada Mia1, Mst. Masrufa Akter2
1
Department of Statistics, Pabna University of Science and Technology, Pabna-6600, Pabna, Bangladesh
2
Department of Economics, University of Rajshahi, Rajshahi-6205, Rajshahi, Bangladesh
Corresponding Author: Md. Shahajada Mia

Abstract: To achieve the higher economic growth is the vision of Bangladesh. This study tries to find out the
scenario of the GDP in Bangladesh and identify the significant factors of GDP based on the secondary data
collected from World Bank from the period of 1990 to 2017. GDP is considered as dependent variable and price
inflation, gross savings, FDI net inflows and labor force are considered as independent variables. Several
diagnostic test namely normal probability plot and heteroscedasticity test are used in this study. The result of
the test is that the data are normally distributed and the variance of error term is homoscedastic. The result of
this study is that the GDP of Bangladesh are growing up. Gross savings and labor force total are statistically
significant factors of GDP growth. Good governance and political stability play an important role to increase
the economy of Bangladesh.
Key words: Gross Domestic Product, Price inflation, Foreign Direct Investment, Labor force, Gross savings,
Regression, Heteroscedasticity.
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Date of Submission: 03-08-2019 Date of Acceptance: 19-08-2019
----------------------------------------------------------------------------------------------------------------------------- ----------

I. Introduction
There are some economic facts of life that emphasize all macroeconomic explanations of growth.
Possibly the most significant factor is that accumulate the capital goods, the consumer good will have to be
foregone at present to generate more units of consumer goods in the future. An increase in the amount of capital
goods or capital formation is termed as an investment. For the economic growth to occur the level of investment
has to be greater than the amount of depreciation, i.e. the quantity by which machines wear out or become
outdated during the year. Economic growth indicates the growth in economic output over the period which is
measured by GDP where GDP is the market value of all the products and services that are produces by the
people and property of a given country, for the period of one year. The evaluation process also involves the sum
of value added at every stage of production (the intermediate stages) of all final commodities (goods and
services) produced within a country in a given period of time monetarily Real economic growth (GDP) can be
studied using a concept of two-component, economic growth – a deviation or business cycle and an economic
trend component. The trend component or economic growth is accountable for the long-term expansion and
describes economic efficiency. The deviation component of economic growth has to have a zero mean value in
the long run (Kitov, 2006). The most influencing indicators used for assessing economic growth are Gross
Domestic Product (GDP), Gross National Product (GNP) and Balance of Payments (BOP). In this study we
have tried to identify the “Factors Affecting Gross Domestic Product (GDP) of Bangladesh”.
There are many factors affect economic growth (GDP) such as inflation, FDI, population growth,
capital formation, export, import, employment, unemployment, personal remittance, life expectancy, personal
income, industrial growth. Other factors can be living standard, geographical location, demographics,
urbanization, democracy, inequality, government spending, poverty etc. Economic growth (GDP) can affect
positively and negatively where both are important for a country. Bangladesh is a densely populated with 1,278
people per square kilometer (2018) and now considered as a lower middle income country. The economic
development of Bangladesh is growing faster. Bangladesh has become independent in 1971 from Pakistan. The
war almost completely destroyed the physical infrastructure. There has been huge economic progress in
Bangladesh since its independence, accelerated from an average of less than 4% per year during 1972-1990 to
6.4% in 2010-2013. Now the vision of Bangladesh Government is to attain middle income status by the year
2021. From the report of Bangladesh bank, annual growth rate in Bangladesh averaged 5.69% from 1994 until
2017 and it has reached 7.30% in 2017 which is the highest growth rate in economic history of Bangladesh.

DOI: 10.9790/5933-1004036670 www.iosrjournals.org 66 | Page

 Factors Affecting Gross Domestic Product of Bangladesh

II. Literature Review

The linkage between this study and past researches can be found in this section and are taken into
consideration and used as guidance to determine a connection between GDP growth and its factors. FDI has
always been the major source to finance the economic activities of a country. There are some studies on the
relationship between FDI and economic (GDP) growth. To analyze the role of FDI in economic growth Faruk
(2013) used GDP took as dependent variable and FDI as the independent variable. The result showed that FDI is
statistically significant and can explain 83% Fluctuation about of GDP. The correlation showed that GDP and
FDI is highly correlated (0.912024), in the perspective of Bangladesh economy, especially different sector like
Garments, Banking, Telecommunication, Fertilizer and other manufacturing sectors. Herzer et al. (2008), have
mentioned that there is a positive relationship between FDI and economic growth (GDP). However, Duasa
(2007); Karim and Yusop (2009), found that there is no causal relation between FDI and GDP growth. Based on
empirical studies it showed that female labor force participation rate has proved a significant impact on GDP
growth. Through the female labor force participation rate, the average household income has improved thus it
did increase the GDP growth. The study about the relationship between GDP growth and gender equality in
labor force especially female participation rate seems to be the longest research conducted by many researchers.
The common result from research done by Bryant et al. (2004), concluded that by increasing the labor force
participation of women, it increases the rate of GDP. Roy (1991) in his study analyzed the determinants of
export performance of Bangladesh using an econometric analysis and demonstrated that the export performance
of Bangladesh is associated with greater commodity diversification of exports. In a study over the 1962-1992
periods, Begum and Shamsuddin (1998) find that export growth significantly increases economic growth
through its positive impact on total factor productivity in Bangladesh. According to Sidrauski (1967), the
inflation has insignificant impact on economic growth. This study was then supported by Sarel (1996). Iqbal
(2010) argued that FDI is generally considered as a factor which enhances economic growth, as well as the
solution to the economic problems of developing countries. Fotopoulos and Louri (2004) examined a modal
which consists of five variables as GDP, FDI, labor force, and gross capital formation as a percentage of GDP,
which founded that Pakistan’s capacity to progress on economic development will depend on performance in
attracting FDI Shirazi and Manap (2005) analyze the export-led growth (ELG) hypothesis for five South Asian
countries including Bangladesh using co-integration and multivariate Granger Causality tests. They showed
feedback effects between exports and GDP and imports and GDP for Bangladesh.

III. Material And Methods

Data used in this study were records of GDP and its different factors (i.e. price inflation, gross savings,
FDI and labor force) for the period from 1990 to 2017 from World Development Bank. The line diagram used to
show the scenario of GDP in Bangladesh. The ordinary least square (OLS) method and normality test is used for
the analysis. Multiple regression model have used for the study and OLS method is used to estimate the model
of GDP in Bangladesh. We have used GDP as a dependent variable and price inflation rate (INF), gross
savings(SAV), foreign direct investment (FDI) and labor force total (LF) as independent variables. The model of
GDP is specified as
𝐺𝐷𝑃𝑡 = 𝛽0 + 𝛽1 𝐼𝑁𝐹𝑡 + 𝛽2 𝑆𝐴𝑉𝑡 + 𝛽3 𝐹𝐷𝐼𝑡 + 𝛽4 𝐿𝐹𝑡 + 𝑢𝑡
Where 𝛽0 is the constant term, 𝛽1 , 𝛽2 , 𝛽3 𝑎𝑛𝑑 𝛽4 represents the coefficient of selected independent variables and
𝑢𝑡 represents the random error term.

After model specification we have find the most influencing factors of GDP. Our main hypothesis are stated as
follows:
𝐻1 : Price inflation affect the GDP of Bangladesh.
𝐻2 : Gross savings affect the GDP of Bangladesh.
𝐻3 : FDI affect the GDP of Bangladesh.
𝐻4 :Labor force total affect the GDP of Bangladesh.
Then we check normality by plot the histogram of residuals of the GDP and ARCH heteroscedasticity test is
used to check the variance of error term is homoscedastic or heteroscedastic.

IV. Results and Discussion

Gross Domestic Product in Bangladesh
The Gross domestic Product (GDP) is the market value of all final goods and services produced within
a country in a given period of time. The GDP is the officially recognized totals. The following equation is used
to calculate the GDP:
𝐺𝐷𝑃 = 𝐶 + 𝐼 + 𝐺 + (𝑋 − 𝑀)

DOI: 10.9790/5933-1004036670 www.iosrjournals.org 67 | Page

 Factors Affecting Gross Domestic Product of Bangladesh

Written out, the equation for calculating GDP is:

GDP = private consumption + gross investment + government investment + government spending + (exports –
imports).

Figure-1 shows the GDP (per million US$) of Bangladesh from 1990 to 2017. We can say that in 1990 the GDP
of Bangladesh was 31598 US$ (per million) but from 1990 until 2017 it was growing up and in 2017 it was
249723.86 US$ (per million). Table-1 shows the descriptive statistics of different variables namely GDP, Price
inflation, Savings, FDI net inflows and labor force total (Per million US$) of Bangladesh from year 1990 to
2017. The average GDP of Bangladesh from 1990 to 2017 is 87992.13 US$ (per million) and its minimum and
maximum values are 30957.48 US$ (per million) and 249723.9 US$ (per million) respectively.

195078.68
221415.19
249723.86
172885.45
300000.00
GDP PER MILLION IN US$

149990.45
133355.75
128637.94
250000.00

115279.08
102477.79
91631.28
200000.00

79611.89
71819.08
69442.94
65108.54
60158.93
54724.08
53991.29
53369.79
51270.57
49984.56
48244.31
46438.48
37939.75
33768.66
33166.52

150000.00
31708.87
31598.34
30957.48

100000.00
50000.00
0.00
1992

1999

2006

2013
1990
1991

1993
1994
1995
1996
1997
1998

2000
2001
2002
2003
2004
2005

2007
2008
2009
2010
2011
2012

2014
2015
2016
2017
TIME

Figure-1: GDP of Bangladesh.

Table-1: Descriptive Statistics of different variables.

Variable Minimum Maximum Mean Standard deviation Skewness Kurtosis
GDP 30957.48 249723.9 87992.13 61083.53 1.307897 0.876083
Price Inflation 0.155518 19.14321 5.752347 3.237191 2.528632 10.7622
Savings 6932.201 87996.55 30173.58 24706.95 1.036176 -0.07904
FDI net inflows 1.390444 2831.153 797.2513 930.4838 1.047558 -0.25552
Labor force total 34.58584 66.64226 51.19169 9.896017 -0.16111 -1.22254

Regression Analysis
The purpose of this analysis is to explain on the relationship between dependent and independent variables
through a model. In addition Ordinary Least Square (OLS) method has been chosen to model of multiple
regression function. The estimated regression model is
𝐺𝐷𝑃𝑡 = 39114.75 − 613.71𝐼𝑁𝐹𝑡 + 2.94𝑆𝐴𝑉𝑡 − 7.03𝐹𝐷𝐼𝑡 − 594.14𝐿𝐹𝑡

Table-2: OLS Results.

Variable Coefficient Std. Error t-Statistic Prob. 𝑅2 Adjusted 𝑅 2 F-Sig.
C 39114.75 10679.74 3.662517 0.0013
PRICE INFLATION -613.7109 510.8768 -1.201289 0.2419
SAVINGS 2.938064 0.173669 16.91758 0.0000 0.993 0.991 0.000
FDI NET INFLOWS -7.027073 3.914769 -1.795016 0.0858
LABOR FORCE TOTAL -594.1415 265.8747 -2.234667 0.0354

From the above table-2 we can say that the model of GDP in Bangladesh is the best fitted model since
the p-value of F test is less than 0.05 and the value of 𝑅2 is close to 1. The value of coefficient of determinant
𝑅2 = 0.993 tells that the 99.3% of the variations in the GDP is explained by the independent variables such as
national price inflation, gross savings, labor force total and FDI net inflows. It also can be noticed that among
the factors of gross saving have positive impact on GDP in Bangladesh. On the other hand the price inflation,
FDI net inflows and labor force total has a negative impact on GDP in Bangladesh. The coefficient of price
inflation measure that if the values of price inflation increase 1 US$ on an average the values of GDP goes down
613.71 US$. The coefficient of gross savings measure that if the values of gross savings increase 1 US$ on an
average the values of GDP goes up 2.93 US$. The coefficient of FDI net inflows measure that if the values of
FDI net inflows increase 1 US$ on an average the values of GDP goes down 7.02 US$. The coefficient of labor
force total measure that if the values of labor force total increase 1 US$ on an average the values of GDP goes
DOI: 10.9790/5933-1004036670 www.iosrjournals.org 68 | Page
 Factors Affecting Gross Domestic Product of Bangladesh

down 594.14 US$. However, the p-value of t-Statistic of gross savings and labor force total fall in rejection
region at 5% significant level and it leads to significant to the GDP growth. While the p-value of t-Statistic of
price inflation and FDI is fall in acceptance region. It concluded that these variables influence insignificantly to
GDP growth.
Based on the hypothesis that has been tested. It shows that gross savings and labor force total is to be
statistically significant factors in the explanation of GDP growth in Bangladesh.

Normality and Heteroscedasticity Tests

From figure-2 we can say that the data is normally distributed since it is bell shaped. The normal
probability plot (shown in figure-3) also shows that the data is normally distributed since the observed value and
predicted value are approximately equal of each other.

Figure-2: Residual plot of GDP.

Figure-3: Normal P-P plot of residual.

To run the heteroscedasticity test we assume the following hypothesis

𝐻0 : The variance of error term is homoscedastic.
𝐻1 : The variance of error term is heteroscedastic.

Since the p-value on table-3 is larger than 5% level of significance therefore we can say that the null hypothesis
is accepted that leads to the variance of error term are homoscedastic.

Table-3: Heteroskedasticity Test: ARCH

F-statistic 0.154132 Prob. F(1,25) 0.6979
Obs*R-squared 0.165443 Prob. Chi-Square(1) 0.6842

DOI: 10.9790/5933-1004036670 www.iosrjournals.org 69 | Page

 Factors Affecting Gross Domestic Product of Bangladesh

V. Conclusion and Implications

This paper has presented an analysis for determining the factor affecting Gross Domestic Product
(GDP) in Bangladesh. For this study secondary data are collected from World Bank from year 1 990 to 2017.
Based on the result we can say that the GDP of Bangladesh curve concave up. i.e. In this study it can be
concluded that gross savings and labor force total is to be statistically significant factors in the explanation of
GDP growth in Bangladesh and the gross savings has a positive relationship with GDP. While the other
variables such as price inflation and FDI are insignificant factors. It does not mean the other factors are not
important or significant. It might be because of limited access to the availability to the data and missing data on
the certain variables.
From the last few years the economic growth of Bangladesh has been achieving sustainable GDP
growth. The root of the GDP growth in Bangladesh is “good governance. So good governance can play vital
role to the economy of Bangladesh. Corruption and political instability is the main problem of our country. So
when good governance will be established political instability will be decreased.

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DOI: 10.9790/5933-1004036670 www.iosrjournals.org 70 | Page

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