Egypt is located is the northeastern part of Africa, and the majority of the country’s economic activities is concentrated in the Nile valley, a highly fertile area that bisects the country. The economy of Egypt is mainly represented by agriculture, industry, and services sectors, which comprise approximately 14.5%, 37.5%, and 48% of the country’s GDP respectively (CIA World Factbook, 2014). Key economic sectors include tourism, construction and manufacturing. Governmental actions and political uncertainty negatively impact the country’s economic condition for the past several years. As a result, Egypt shows a declining economic growth and rising unemployment rates. This paper provides a detailed report on Egypt’s economic performance, chiefly focusing on analysis of the country’s GDP, unemployment, and inflation rate.
- Gross Domestic Product
Gross domestic product (thereafter, GDP) is one of the most commonly used indicators to measure the value of the country’s economy. It represents the total market value of goods and services produced within the economy. GDP is usually calculated on a quarterly or annual basis and is denominated in a local currency. Of course, the currency representing GDP can be easily converted in any other currency through exchange rates. In this research, for example, Egyptian pound (EGP) was converted into Saudi Riyal (SAR). In order to fully understand the importance and usability of GDP, it is necessary to analyze specific aspects associated with this indicator.
Firstly, GDP consists of several components, which are: consumer spending, investment, governmental spending, and net exports. Consumer spending corresponds to the total amount of expenditures incurred by households on services and goods. For instance, it includes food, clothes, medical care. Investment represents spending on structures, inventories, and capital equipment. For example, spendings on housing and machinery are a part of this component. Governmental spending refers to total expenditures incurred by the governmental institutions, and include expenses on salaries of governmental employees, and spendings associated with national defense. Finally, net exports represent a difference between a country’s total exports and imports. If the country exports more, and, as a result, foreigners purchase more of this country’s products than its citizens spend on imported goods, the net exports indicator will be positive.
Secondly, there are two relatively similar indicators, GDP and GNP, or gross national product. It is important to differentiate between them. While GDP counts the total market value of all goods and services produced within a country, regardless of the producers’ country of origin, GNP represents the total market value of goods and services produced specifically by the country’s permanent residents both within and outside of this country. These indicators are usually relatively close to each other, but GDP is much more widespread in terms of measuring the value of a country’s economy.
Thirdly, there are two types of GDP: real and nominal. Real GDP is calculated at current prices, while nominal GDP is computed at constant prices of a certain base year. As a result, real GDP does a better job of indicating the current value of the country’s economy, but nominal GDP is arguably better when analyzing a large period of time, because it disregards the increase in prices. For instance, a country might demonstrate a higher GDP year-on-year, but in fact, it may be due to an intense growth of prices, and the production volumes might actually be lower than the previous year. As a result, growth in real GDP does not necessarily indicate the improvement of a value of a country’s economy. For this reason, when analyzing real GDP dynamics, it is important to analyze the changes in inflation rate as well.
Finally, while GDP is a solid indicator of a value of a country’s economy, it does not always reflect its standards of living. For that purpose, GDP per capita is calculated. It equals the GDP divided by the total population of the country, and shows how much GDP is allocated per each person. Consequently, it is possible to make assumptions about the standards of living in the analyzed country. The higher the country’s GDP per capita is, the better are the living standards there.
Figure 1 (World Bank, 2014) represents the dynamics of the annual real GDP and the GDP growth of Egypt denominated in SAR for the period from 2008 to 2013.
Figure 1
GDP (annual current SAR bn.) and GDP growth rate (annual %) of Egypt
Figure 1 contains another important indicator – GDP growth. It is denominated in percentage, and shows whether the value of a country’s economy has increased or decreased compared to the previous year. It is very useful when analyzing a certain period of time, in order to draw conclusions about the improvement or worsening of a country’s economic situation.
In the case of Egypt, we can see that the absolute value of the country’s GDP has been steadily growing since 2008. However, the growth rates have been highly volatile and mainly dropping for the analyzed period. While the growth rate was relatively high in 2008, and equaled 7.2%, the average growth rate for 2008-2013 constituted only around 3.8%, and was considerably lower than average for the three most recent analyzed years – 2011, 2012 and 2013. This indicates that the economy of Egypt is experiencing certain difficulties, and allows to assume that the growth rates will continue dropping in the nearest future.
Appendix A (World Bank, 2014) indicates Egypt’s GDP per capita and its growth rates for the period of 2008-2013. This indicator has been steadily increasing, and it is possible to assume that the quality of life has been increasing in this country. For instance, in 2013, with a total population of over 82 million people, each person got SAR 12 432.55 on average out of Egypt’s GDP. Obviously, it doesn’t mean that each individual receives this actual amount of money, but it gives the idea about the standards of living in Egypt. However, the growth rates have been dropping, so there is also a possibility that within the nearest future, this indicator will stop growing or may even start declining. There are some countries that have a massive population, and although they may have an incredibly large GDP, the majority of people there may be poor, because each individual receives only a tiny fracture of the country’s GDP.
- Inflation Rate
Inflation rate allows to make assumptions about the changes in cost of living within a country. It shows how the prices within a country have changed over time, usually on an annual basis. From the short-term perspective, those changes may not seem significant, but they add up over time, and a good that cost SAR 50 thirty years ago can now cost SAR 100 or even more. As a result, the cost of living increases. There are two standard ways to measure inflation: through the consumer price index (CPI) and using the GDP deflator.
CPI represents the year-on-year changes in prices of a fixed basket of goods. It assumes that the quantity of consumed goods and services within this basket is static, and only evaluates changes in price. CPI allows to estimate how much more expensive a standard set of goods and services purchased by the majority of population has become, showing the increase or decrease in the cost of living within a country. This indicator has its flaws, however, because it does not take into account the effects of substitution. For instance, if due to some unfortunate event the price of apples becomes too high, consumers will most likely substitute this good with oranges or bananas. CPI does not reflect this phenomenon, so it may sometimes overstate the inflation rate within a country.
GDP deflator is computed through the division of nominal GDP by the real GDP. As a result, it indicates the difference in price of all goods and services produced within an economy. Consequently, a flexible basket of goods is represented by this indicator. Additionally, GDP deflator takes into account the effect of substitution. However, this method of calculating inflation also has its disadvantages. It assumes that the consumers will always substitute, therefore underestimating the impact of rising prices on customers. For instance, the inflation rate calculated through GDP deflator may seem relatively low, allowing to assume that the cost of living in a country is not increasing dramatically. In the reality, however, households within this economy may be forced to purchase the cheapest goods and services of the lowest quality, because the prices on better goods have risen sharply.
As a result, while GDP deflator is a more flexible indicator of inflation, it does not necessarily represent the cost of living as accurately as CPI does. Therefore, CPI is more widely used when measuring inflation rate.
Figure 2 (World Bank, 2014) indicates the inflation rate of Egypt measured through CPI for the period of 2008-2013.
Figure 2
Inflation rate (CPI, annual %) of Egypt
We can see that the level of prices has been growing at a much higher rate than the economy. However, the cost of living in Egypt has been steadily decreasing since 2008, and began to rise again only in 2013, when the inflation rate jumped from 7.1% to 9.5%.The average inflation rate of Egypt for the analyzed period constituted 11.33%, and for the three most recent analyzed years: 2011, 2012, and 2013, was below average.
- Unemployment Rate
Unemployment is also one of the key macroeconomic measures of a country’s economy effectiveness and its overall economic situation. It is calculated by dividing the total number of people that are capable of working by the total number of unemployed people that are capable of working. As a result, it allows to estimate the percentage of population that does not have jobs within the economy. Certain categories of population are excluded when computing unemployment, and include people that are below or above working age, and disabled people who are not capable of working. Usually, the indicator of total unemployment rate is presented to measure unemployment, but to gain a better understanding of a country’s unemployment structure, it can also be divided by age groups and sexes.
The significance of this indicator for the economy is reflected in the costs of unemployment. When the unemployment rate is high, there is a large percentage of population that could potentially be working and producing goods and services for the economy, but is not able to do so. Additionally, when people have no stable source of income, they are spending very little. As a result, it is harmful for a country’s economy, and negatively impacts its GDP.
There are three main types of unemployment: frictional, structural, and cyclical. The first one refers to the unemployed people who are currently switching jobs. For instance, a person may be relocating or just waiting for his/her position to open within a company. So, these people are not actively looking for work, but are just waiting to start working on their new job. Structural unemployment relates to the portion a country’s unemployed population that does not have the necessary skills to meet the demand of the economy. For instance, routine and clerical jobs are now being largely replaced by automatized processes, and, as a result, demand for such skills is dropping rapidly. Cyclical unemployment reflects the percentage of unemployed population that has the necessary skills, but cannot find work due to unfavorable economic conditions within a country. For example, when a country’s economy is experiencing a severe downturn due to a global financial crisis, many people are being fired, because the companies are no longer able to maintain a large amount of workforce. This type of unemployment is being called cyclical because it relates to the cycles of the economy, when upturns are generally followed by downturns.
Finally, when analyzing this indicator, it is important to understand the concepts of full employment and the natural rate of unemployment. Full employment refers to a situation where the rate of unemployment within an economy is minimal, and the small portion of unemployed people represent the natural rate of unemployment. The latter relates to the total amount of people that are unemployed due to frictional and structural unemployment. There is always a portion of people in-between jobs, and there are always some workers that have just entered a job market. As a result, a country is considered to have a normal rate of unemployment if it equals approximately 6%. Of course, it considerable varies across different economies, but if a country’s unemployment rate is close to this value, it is possible to assume that it operates close to its maximum economic capacity.
Figure 3 (International Labor Organization, 2014) demonstrates the total rate of annual unemployment in Egypt for the period of 2008-2013. Total unemployment rate of Egypt has been steadily growing since 2008 with the average rate being equal to 10.83%. During the three most recent analyzed years: 2011, 2012, and 2013, the unemployment rate was above the average rate. The unemployment rate slightly dropped in 2010, but has been rising considerably since then. These dynamics allow to assume that the unemployment rate in Egypt will continue to increase during the nearest following years.
Figure 3
Total unemployment rate (% of total labor force) of Egypt
Conclusion
This research has analyzed the performance of Egyptian economy based on the three key measurements: GDP, inflation rate, and unemployment rate. The importance of these indicators was discussed using the main concepts and terminologies.
According to the analyzed data, economy of Egypt performed relatively weak during 2008-2013, and the dynamics of the data set unfavorable trends for the future. While the absolute value of the country’s GDP has been increasing steadily, GDP growth rates have dropped sharply. The same is true for GDP per capita, although this indicator has been decreasing even more. Inflation rate has been rising at a higher pace than the economy, indicating that the economic growth does not compensate the increase in the cost of living. Unemployment rate has been growing considerably as well, implying the worsening of the economy’s effectiveness.
Appendix A
GDP per capita (annual current SAR) and growth rate (annual %) of Egypt
Appendix B
Key economic indicators of Egypt, 2008-2013
References
Central Intelligence Agency of the United States. (2014). The World Factbook [Data File]. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/eg.html
International Labor Organization. (2014). LABORSTA Database [Data File]. Retrieved from http://laborsta.ilo.org/STP/guest
The World Bank. (2014). World Development Indicators [Data File]. Retrieved from http://databank.worldbank.org/data/views/variableselection/selectvariables.aspx?source=world-development-indicators#
