Introduction
Today’s column wraps-up my consideration of absorption capacity. This is the fourth on the list of top-ten development challenges, which spending Guyana’s expected significant Take (petroleum revenues) has to navigate in coming years in order to achieve sustained development. Following this, I introduce a discussion of the perils of an enclave economy. This is the next topic (fifth) on the top-ten listed development challenges.
Absorptive Capacity – Wrap-up
Last week’s discussion ended with a brief reference to the output gap approach (also known as the GDP gap approach) used for estimating Guyana’s absorptive capacity. Careful measurement of this gap is essential for keeping track of the condition of this metric, if it is employed as the proxy for absorptive capacity. I readily admit on this matter that measurement is difficult. This is basically because all market–based economies operate with numerous “ups and downs” in their prevailing levels of economic activity.
These “ups and downs” are classified by economists as due to 1) seasonal factors (for example, more activity in the agricultural sector at the time of planting and reaping crops; 2) cyclical factors (for example, short-term swings in the flow of investment, consumption and government spending as the economic and business outlook changes); 3) random shocks (for example, natural factors like heavy rainfall, floods, drought); and 4) other exogenous factors (largely external). Good examples of these are changes in export and import prices, which are reflected in the terms of trade.