Tonga – Draft

Thomas Gill

Macro

3-18-2008

(GDP) KINGDOM OF TONGA

The Gross Domestic Product (GDP) is measured by taking the sum of the value added by all resident producers in an economy plus any product taxes not included in the valuation output. It is calculated without making deductions for depreciation of fabricated capital assets or for depletion and degradation of natural resources. Value added is the net output of an industry after adding up all the outputs and subtracting intermediate outputs.

GDP is the most commonly used method of measuring an economy’s output, and is meant to measure how much an economy produces in an allotted amount of time. To find it you put in the production method to measurement, it is the market value of the final goods and services produced in a country during a given period. The market value is compromised of goods and services produced in the economy, including those by the government, and excluding those that are not sold in markets from the GDP. Examples of the final goods and services that are counted in GDP are factories and machines, which are capital goods. Goods and services not counted in GDP are intermediate. Those are used up in the production of final goods and services. If any goods and services are either not produced within the country or within the given period of time the GDP is being measured for, those goods do not count towards the GDP total.

Another way to measure GDP is with the expenditure method. According to Frank and Bernanke (2007), “GDP can be measured with equal accuracy by either of two methods: (1) adding up the market values of all the final goods and services that are produced domestically or (2) adding up the total amount spent by each of the four groups on final goods and services and subtracting spending on imported goods and services. The values obtained by the two methods will be the same.” From those four groups of final goods, there are four areas of expenditure: consumption (spending by households), investment (spending by firms), government purchases (purchases by federal, state, and local governments), and net exports (exports minus imports).

A third face of GDP used to measure its total is to think of it as the incomes of capital and labor. “Whenever a good or service is produced or sold, the revenue from the sale is distributed to the workers and the owners of the capital involved in the production of the good or service. Thus, except for some technical adjustments, GDP also equals labor income [(two-thirds of GDP: wages, salaries, and incomes of self-employed)] plus capital income [( one-third of GDP: physical- factories, machines, and office buildings; intangible-copyrights and patents)]” (Frank and Bernanke, 2007).

To look more closely at GDP over different points of time, economists use a method of excluding the effects of price changes, and adjust for inflation. So, a common set of prices is used to value the quantities produced in different years, and an equation involving the information from a base year that is not current, but recent. This equation results in the estimate of the real GDP (actual physical volume of production), whereas the measure of GDP in current-year prices is defined as nominal GDP (the current dollar value of production).

A common error made by the public is to consider real GDP an estimate of a country’s economic well-being. These two are not one and the same, and do not necessarily implicate each other. An increase in GDP does not mean that the country is doing better economically, but real GDP per person can be related to a higher standard of living. Thus, it is possible for a higher real GDP to allow for greater economic well-being, but it is not a guarantee.

The Kingdome of Tonga consists of four main islands located in the south pacific. Tonga is the only archipelago in the pacific never to have been colonized. It lies southeast of Samoa and east of Fiji and is about one third the way between New Zeeland and Hawaii. Tonga is a country that relies on constant donor support. The annual real GDP growth average was slightly over two percent in 2001 to 2004. In 2005 the growth average of GDP raised to 2.8 percent. Agricultural trade was the main drive for this growth. In 2005 the inflation rate when up in Tonga. It went up to double digits because of the high commodity oil prices and the pressure on public finance. In the external region of the economy there was a big raise in public sector wages from 200 to 2001. This led to difficulties in tax administration and led to a deficit of three percent of GDP in 2003, because of this public dept declined from fifty six percent of GDP in 2003 to forty five percent of GDP in 2004.

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Tonga’s economy depends mainly on agriculture. Squash is there main agricultural export by other exports such as fishing tourism and other open market trades. In 2003 the agricultural sector was widely affected by lowering squash exports prices and low fish catch rates. This was caused by poor weather conditions throughout the year. This put growth at below one percent in 2004. However in 2005 there was recovery in agriculture. They were growing better crops and catching more tuna. The Tongan economy highly depends on their squash trade; this one vegetable is the whole reasoning behind their whole export factor.

During 2005 tourist made up seven percent of the economies GDP. This was a thirty three percent increase from the previous year. Tonga’s remittance determines about twenty five percent of their GDP per year. Although Tonga’s small size economy brings challenge to their economic development they can still do allot to maximize economic growth. This has been accomplished by many small island countries and states. Some key steps to accomplishing this are strengthening their governance and accountability throughout their public sector, and focusing on government involvement in areas of comparative advantage and providing private sector development. Some other ways to go about doing this are to call for an increase and include public enterprise reform. This will improve the efficiency of the enterprise and reduce the share of public budget. In the end this will strengthen the revenue through reform of the tax system.

Tonga has been a World Bank member since 1985. Since then Tonga has received four IDA credits totaling US $21 million. Most of this money has been in health, hazard management and finance sectors. The World Bank has a growing partnership with Tonga hoping that one day the government will progress its key reforms. Tonga just like most countries has a reform agenda. A reform agenda is an agenda that sets a plan for economic growth. The World Bank believes that Tonga will fallow this agenda and this is their reasoning for standing behind Tonga and helping them get to their goal.

Tonga has many development partners which are called donor ordinations. Tonga’s main partners are Australia, the European Union, Japan, and New Zeeland. These partners aid Tonga in things such as agricultural advancements, health care, education, and training, health management, waste management, tourism management and other sources of training. Basically they stand by Tonga helping them to become a better economically advanced country aiding them in every sector.

Country Kingdom of Tonga

Prime Minister Prince Lavaka ata ULUKALALA (since February 2000)

Head of State King Taufa’ahau TUPOU IV (since 16 December 1965)

Independence June 4, 1970 (from UK protectorate)

Government Hereditary constitutional monarchy; prime minister and deputy prime minister appointed

for life by the monarch.

Land area 718 sq km; archipelago of 169 islands (36 inhabited)

Population 101,803 (2004 est.). Population growth is 0.3% (2004 est.).

Cities Capital: Nuku’alofa

Provinces Eua, Ha’apai, Niuas, Tongatapu, and Vava’u.

Languages Tongan and English.

Natural Hazards Cyclones (October to April); earthquakes and volcanic activity in Fonuafo’ou.

Natural Resources F i s h and fertile soil.

Major Products Tonga has a narrow export base in agricultural goods. Squash, coconuts, bananas, and

vanilla beans are the main crop

References

Bureau of Western Hemisphere Affairs (2007,October). Background note: Costa Rica. Retrieved November 6,2007 from http://www.state.gov/r/pa/ei/bgn/2019.htm

Central Intelligence Agency (2007). The World Factbook. Retrieved November 6,2007 from http://www.cia.gov.cia/publications/factbook

Wikapedia(2007, November)GDP of Tonga http://en.wikipedia.org/wiki/Economy_of_Tonga

WorldGDP(2007,October)Tonga GDPhttp://siteresources.worldbank.org/INTPACIFICISLANDS/Resources/H-TONGA.pdf