SYMBIOSIS INSTITUTE OF MANAGEMENT STUDIES

MACRO ECONOMICS RESEARCHAnalysis of the economy in terms of circular flow

Submitted To:Submitted By:Dr. Harnita Chowdhary Shuvashis ShresthaC-51

Sumeet ThapaC-52

Ashima AroraC-53

Arzoo BistaC-54

Deepika RaniC-55

Jaslin JaisonC-56

Kirtika Tiwari C-57

Varundeep SolankiC-58

Amita ThapiyalC-59

Priyanka YadavC-60

The Circular FlowThe cyclical operation of demand, output, income, and new demand Leakages: flows out of circular flow when resource income is received and not spend directly on purchases from domestic firms Injections: Added spending in circular flow that does not come out of current resource incomeSimple Model

If all income is spent business will sell all goods, and will be induced to produce all goods again Flow with Leakages/ Injections

Leakages in the circular flow are savings and taxes. Injections in the circular flow are investment and government spending.If planned (I+G) = planned (S+T) so that injections = leakages and total spending = total income and demand = supply then we have a stable economy .If leakages are Higher than injections (Planned S+T > Planned I+G), economy contracts resulting in inventory accumulation too little spending and drop in prices. If injections are Higher than leakages (Planned I+G > Planned S+T), economy expands resulting in more goods and services produced at higher prices.Economies Covered : New Zealand and Bhutan New Zealand

Production base:Production base of any economy consists of three sectors- primary (agriculture), secondary (manufacturing) and tertiary (services).The services sector contribute to almost two third of New Zealands GDP followed by manufacturing and primary sector.

Figure 1: Contribution in GDP

Figure 2: Workforce in the three main sectorsPrimary Industries:Primary sector accounts for 7.6% of GDP and contributes over 50% of New Zealands total export earnings.Agriculture Products:wheat, barley, potatoes, pulses, fruits, vegetables; wool, beef, dairy products, fish.

Agriculture and Horticulture:Agriculture directly accounts for around 5.0% of GDP, while the processing of primary food products accounts for a further 2.8%.

Table Gross Agricultural Production

Recent fluctuations in commodity (particularly dairy) prices have highlighted the importance that agriculture plays in the New Zealand economy. Horticultural products have become increasingly important, with the principal crops being wine and kiwifruit. Other significant export products include apples and pears, fresh and processed vegetables, and seeds.

Forestry:

Forestry and logging makes up around 1.3% of GDP and is the basis of an important export industry, with almost 70% of wood from the planted production forests eventually being exported in a variety of forms, including logs, wood chips, sawn timber, panel products, pulp and paper, and further manufactured wooden products, including wooden furniture.

For the year ended September 2011, the value of exports of forestry products was $4.6 billion, 10.1% of New Zealands total merchandise exports. China and Korea were the largest markets for log exports at $1,077 million and $307 million respectively, while India and Japan continue to be important destinations for the export of sawn timber. Fishing:

New Zealand has an Exclusive Economic Zone (EEZ) of 3.1 million nautical square kilometres supporting a wide variety of inshore fish, some large deep-water fish, squid and tuna. New Zealands unpolluted coastal waters are also well-suited to aquaculture.Fishing is a major New Zealand industry and an important merchandise export earner. Fish and other seafood accounted for $1.53 billion in export revenues in the year ended September 2011. The main export markets are Hong Kong, Australia, the United States and Japan.

Energy and Minerals:

New Zealand has significant natural energy resources, with good reserves of coal, natural gas and oil/condensate, extensive geothermal fields, and a geography and climate which have supported substantial hydro-electric development. The main minerals mined, in addition to coal, are gold, silver, ironsands, various industrial minerals and gravel for construction. Programmes for the exploitation of New Zealands energy resources were accelerated after the first oil shock in 1973. Oil and gas exploration was increased and energy conservation programmes were developed and promoted. As a result, New Zealand was able to meet a significant proportion of its overall energy requirements. More recently there has been a renewed interest in the development of energy and mineral resources to contribute to economic growth, including the issuance of new licences for the exploration of significant offshore oil prospects.

Natural Gas:

Natural gas is currently produced from 20 fields and wells. There are three main uses for gas in New Zealand: electricity generation, petrochemical production and fuel for industrial and domestic purposes.

Oil:

New Zealands exports around 95% of its produced crude oil. New Zealand exports light crudes, while importing heavier crudes suited for its refining plant. While New Zealand is still a net importer of oil, crude oil exports are becoming increasingly important with the value of petroleum exports accounting for 4.9% of total exports in 2011.

Coal:

Coal is New Zealands most abundant energy resource with total in-ground resources estimated at about 15 billion tonnes. Of this, 8.6 billion tonnes is judged to be economically recoverable from 42 coal fields. Of this amount, 80% is relatively low-grade lignite, 15% is middle-grade sub-bituminous, and the remaining 5% is bituminous. Lignite is used mainly for industrial fuel and sub-bituminous coal for industrial fuel, steel manufacture, electricity generation and domestic heating. Bituminous coal, which is typically very low ash, low sulphur coking coal, is mainly exported for metallurgical applications.

Electricity:

Power from renewable resources (hydro and wind generation) accounts for around 70% of total energy production with thermal and geothermal making up the remaining.

Manufacturing:

New Zealands manufacturing industries make an important contribution to the national economy. In the year ended September 2011, manufacturing sector output accounted for 12.2% of real GDP. The proportion of the labour force employed in manufacturing was around 10.3%. Primary sector processing (food and forestry) makes up a significant proportion of the sector. The food manufacturing industry produces high-quality products for both the domestic and export market.This industry enjoys the advantages of a natural environment that is highly conducive to pastoral agriculture, an absence of major agricultural diseases, the potential for year-round production and an international reputation for excellence.

Table Operating Income of the Manufacturing Sector by Industry Group

Service Industries:

Service industries make up a large proportion of the economy, accounting for over two-thirds of GDP. The sector recorded strong growth between 2000 and 2007, with annual growth averaging 3.8%. As the New Zealand economy entered recession in 2008, services growth slowed, but not to the extent of other sectors. With the services sector expanding at a more rapid rate than other areas of the economy, the sector has increased its share of GDP from 66% in 2004 to 72% in 2012.

Infrastructure:New Zealand has a National Infrastructure Plan which seeks to provide a common direction for the planning, funding, building and use of all economic and social infrastructure.It covers the transport, telecommunications, energy, water and social infrastructure sectors. The purpose of the Plan is to improve investment certainty for businesses by increasing confidence in current and future infrastructure provision. Through the Plan, the Government is seeks to achieve better use of existing infrastructure, and better allocation of new investment.

Figure 3: Gross Domestic Product by Industry Group

Transport:

Transport is a major component of economic activity in New Zealand. The countrys transport system owes its characteristics, not only to New Zealands dependence on external trade and remoteness from many of its trading partners, but also to its rugged terrain and scattered population and the division of the country into two main islandsspanning 2,011 kilometres in length. As a result, the establishment of a comprehensive network of roads (around 93,000 kilometres) and railways (4,000 kilometres) linked to ports and airports has involved capital costs that are high in relation to the size of the population. However, the efficiency of the countrys internal transport system has played a critical role in New Zealands economic growth.Much of this transport infrastructure was originally developed and operated by government- owned monopolies. Today, the transport sector is largely deregulated and legislative barriers to competition have been removed. Many previously government owned operations are now privately owned.

Railways:

New Zealands railway system connects all major population centres and includes rail ferries between the North and South Islands. The system was maintained and operated under government ownership until 1993, when it was privatised. The Government has since purchased back both the network infrastructure and rail services. The national rail system operates as Kiwirail. In 2010 the government committed $750 million over three years (provided in $250 million tranches, subject to approved business cases) to support a turnaround plan for Kiwirail to become a fully commercial rail business over time.

Shipping:

Ninety-nine percent of New Zealands total international trade by volume is carried by sea, with around 30 global and regional shipping lines calling at New Zealand ports. Coastal shipping services, operated by both local and international shipping companies, provide intra and inter-island links and play a key role in the distribution of bulk cargos such as petroleum products and cement.

Civil Aviation:

New Zealand is one of the most aviation-oriented nations in the world. In a population of just over 4.4 million there are over 10,000 licensed pilots and more than 4,400 aircrafts. Large aircrafts are used for international and domestic freight and passenger transport. Light aircrafts, including helicopters, are used extensively in agriculture, forestry and tourism.

New Zealand allows up to 100% foreign ownership of domestic airlines and there is no domestic air services licensing. New Zealand has around 40 formal air services agreements with foreign governments. The governments international air transport policy is to maximise economic benefit to New Zealand, including trade and tourism, consistent with foreign policy and strategic considerations.

Tourism:

Tourism is one of the largest single sources of foreign-exchange revenue and a major growth industry in New Zealand. In the year 2011, international tourist expenditure amounted to $9.7billion. The countrys scenery, natural environment and a range of outdoor activities make New Zealand a popular tourist destination.

Australia is New Zealands closest market and by far the largest source of overseas visitor arrivals at 1,122,594 (44.0% of the total) in the year ending 2011. After Australia, the next largest markets are the United Kingdom (230,000 or 9.0% of the total), the United States (185,000 or 7.3% of the total) and China (135,000 or 5.3% of the total). Visitor arrivals from a number of Asian markets have also grown strongly over the past decade, albeit with periods of temporary weakness in the face of higher oil prices and concerns over the H1N1 virus in 2009.Tourism arrivals are sensitive to the New Zealand-dollar exchange rate and fully respond around 15 months after changes. The New Zealand dollar is remained elevated during the first half of 2012, a gradual depreciation is expected in the coming years.

The Rugby World Cup, held in New Zealand over September and October 2011, temporarily boosted international visitor arrivals, but numbers are expected to return to normal levels in subsequent months.

Communications:

New Zealand was the first country to open its entire telecommunications market to competitive entry in 1989. Telecom New Zealand was privatised in August 1990, and today all major competitors are privately owned. The two major providers of fixed line services are Telecom and TelstraClear, with four second-tier providers: Slingshot/CallPlus, Orcon, WorldxChange and Compass. Cellular Services are provided by Telecom New_Zealand, Vodafone and 2degrees.

New Zealand has good broadband access availability (over 95% of dwellings) and significant broadband infrastructure competition in particular areas. The government is investing $1.5 billion through the Ultra-Fast Broadband (UFB) Initiative to accelerate the roll-out of fibre-based broadband to 75% of New Zealanders by 2019. This investment is being more than matched by investment from private sector partners. The Initiative prioritises businesses, schools and health services and certain tranches of residential areas. A related Rural Broadband Initiative is aimed at improving broadband availability outside the UFB area. Postal and courier delivery services are provided by New Zealand Post Limited, a commercially-run SOE, and a range of private providers.

Two major national radio networks, as well as a network that relays parliamentary proceedings, are provided by Radio New Zealand Limited, a Crown entity operating under a non-commercial charter. There are numerous private radio stations.

Television New Zealand Limited (TVNZ), the state-owned television broadcaster, is a Crown Company. TVNZ provides two national free-to-air television channels broadcast in both analogue and digital (with full digital switch-over expected to occur around 2013-15). The state also funds the Maori Television Service, a statutory corporation, to promote Maori language and culture. Private television operators provide a number of other national and regional channels. Digital and analogue pay TV services are also available.

There are five major daily metropolitan newspapers in the main centres and numerous provincial and community newspapers, all of which are privately owned. In addition, there are two national weekly business papers, three Sunday newspapers, a number of wire services and a growing number of internet news services (including offerings from the major newspaper groups) and blogsites.

Below is an example to illustrate the interdependence of various sectors in New Zealand w.r.t. forest:

Figure 4: Interlinked operation of various sectors

Every industry has to get inputs from elsewhere, and sell outputs. This diagram of the forestry industry (part of the primary sector) shows that some of its inputs come from the secondary sector (in the form of machinery and equipment) and the tertiary sector (in the form of finance and transport). It sells its outputs directly to end users overseas in the form of logs, and to the local secondary sector for processing into timber and paper products.

IncomeHousehold income or consumption by percentage share: Lowest 10%:0.3% (1991) Highest 10%:29.8% (1991)

New Zealand's economy was built upon on a narrow range of primary products, such as wool, meat and dairy products. As an example, from approximately 1920 to the late 1930s, the dairy export quota was usually around 35% of the total exports, and in some years made up almost 45% of all New Zealand's exports.

Since 1984, the government of New Zealand has undertaken major economic restructuring (known first asRogernomicsand thenRuthanasia), moving an agrarian economy dependent on concessionary British market access toward a more industrialized,free market economythat can compete globally. This growth has boosted real incomes, broadened and deepened the technological capabilities of the industrial sector, and contained inflationary pressures.

Between 1984 and 1999, a number of measures of New Zealand's economic and social capital showed a steady decline: the youthsuiciderate grew sharply into one of the highest in the developed world;the number of food banks increased dramatically;marked increases in violent and other crime were observed ,the number of New Zealanders estimated to be living in poverty grew by at least 35% between 1989 and 1992; and health care was especially hard-hit, leading to a significant deterioration in health standards among working and middle-class people

The New Zealand economy has recently been perceived as successful. However, the generally positive outlook includes some challenges. New Zealand income levels, which used to be above much of Western Europe prior to the deep crisis of the 1970s, have never recovered in relative terms. The New Zealand GDP per capita is for instance less than that of Spain and about 60% that of the United States. Income inequality has increased greatly, implying that significant portions of the population have quite modest incomes. Further, New Zealand has a very large current account deficit of 89% of GDP. Despite this, its public debt stands at 33.7% (2011 est.)of the total GDP, which is small compared to many developed nations.

New Zealand's economy has been helped by strong economic relations with Australia. Australia and New Zealand are partners in "Closer Economic Relations" (CER), which allows for free trade in goods and most services. Since 1990, CER has created a single market of more than 25 million people, and this has provided new opportunities for New Zealand exporters. Australia is now the destination of 19% of New Zealand's exports, compared to 14% in 1983.Both sides have also agreed to consider extending CER to product standardization and taxation policy. New Zealand initiated afree trade agreementwith Singapore in September 2000 which was extended in 2005 to include Chile and Brunei and is now known as theP4 agreement.

The Labor-led government proceeded with personal income tax cuts on 1st October 2008 and the new National-led government, which came to power in November 2008, introduced further tax reductions effective from 1 April 2009.

Rising demand from developing countries and supply constraints helped push dairy prices, which were their main export, to their highest ever level in both world and New_ Zealand-dollar terms in late 2007. As a result, primary sector incomes were boosted, which, in turn, led spending and investment, spilling over to the wider economy

The main taxes are the personal and corporate income taxes and Goods and Services Tax (GST), a value-added tax. Both are applied at reasonably low rates to broad bases. the introduction of GST in 1986 marked a significant in the mix of taxation from direct to indirect tax. Downstream activities, including transportation, rural financing and retailing related to agricultural production, also make important contributions to GDP

Therefore Exports and Tourism are the main source Of Income for New Zealand.ConsumptionConsumption expenditure is the largest component of total spending in the New Zealand economy, accounting for around three-fifths of expenditure based gross domestic product (GDP) since the late 1980s. Household consumption contributes to a large proportion of New Zealands total consumption of goods and services. However, it is difficult to measure the physical volume of goods and services consumed by New Zealand households. Instead, we measure the expenditure on goods and services by New Zealand households. This is called household consumption expenditure. Household consumption expenditure is a key component of the New Zealand economy, accounting for around 60 per cent of all expenditure on goods and services in New Zealand each year (i.e., GDP expenditure).

As in other developed countries, consumption of goods and services is growing in New Zealand as their population and economy grow. In general, as household consumption grows, environmental pressures grow.

Between 2000 and 2007, the New Zealand economy expanded by an average of 3.5% each year as private consumption and residential investment grew strongly.

Domestic activity slowed sharply over 2008 as high fuel and food prices dampened domestic consumption

The economy grew 1.4% in the year ending December 2011, the fastest pace in over three years. The Rugby World Cup (RWC), exceptional pastoral growth and high export prices provided an elective antidote to the disruptions caused by natural disasters at home and abroad and by sovereign debt woes overseas. The RWC li_ed private consumption spending and tourism Numbers

Advantages:

1. The countrys scenery, natural environment and a range of outdoor activities make New Zealand a popular tourist destination. It serves as the single largest source of foreign exchange.2. Highly connected transport system via ship, rail and air3. Agricultural sector prices and production are both up, delivering substantial increases in rural incomes and a boom in fertilizer buying/application.4. Business investment is on the increase5. The New Zealand economy is now more highly dependent on Australia and China and there are no signs of the so-called European headwinds (to use an over-used economic expression) damaging Chinese or NZ economic performance.6. Market signals are very positive for the NZ economy with both the NZ dollar and NZ share market up strongly over recent weeks.

Disadvantages:1. The manufacturing base is not strong2. Unemployment is high due to more concentration of services sector. This has led to:a. Income inequality has increased greatly as also seen from the figures given above.b. The no. of people below poverty line increased.

Impact on countries U.S. goods and services have been competitive in New Zealand, though the then-strong U.S. dollar created challenges for U.S. exporters in 2001. The market-led economy offers many opportunities for U.S. exporters and investors. Investment opportunities exist in chemicals, food preparation, finance, tourism, and forest products, as well as in franchising. The best sales prospects are for medical equipment, information technology, and consumer goods. On the agricultural side, the best prospects are for fresh fruit, snack foods, specialized grocery items (e.g. organic foods), andsoybeanmeal. A number of U.S. companies have subsidiary branches in New Zealand. Many operate through local agents, with some joint venture associations. TheUnited States Chamber of Commerceis active in New Zealand, with a main office inAucklandand a branch committee in Wellington. However, as of the 2010s,Chinais now New Zealand's second-largest trading partner, behind Australia. Chinas increasing industrialization and rapidly growing incomes will mean that it requires more of those commodities that New Zealand produces.

Conclusion The performance of the global economy exceeded expectations in 2010, but then slowed significantly as public stimulus measures faded, natural disasters in Japan and Australia caused disruption, and Europe sovereign debt issues re-emerged. However, New Zealandsincreasing exposure to the faster growing areas of the world, in particular Australia and Asia excluding Japan, resulted in exports holding up better than otherwise would have been expected. New Zealand trading partner growth is expected to moderate in 2012, before picking up again in 2013. While private consumption is expected to pick up, spending is likely to remain subdued as households remain cautious. Investment is expected to grow strongly as the Canterbury earthquakes rebuild gets underway. The housing market is expected to remain subdued, with weak house price growth constraining household spending.

Leakage

Leakageis the non-consumption uses of income, including saving, taxes, and imports.

The exit of money from the economy through leakage results in a gap between what is supplied and what is demanded. If consumers spend their income outside of their community or country, then businesses must look elsewhere to make up for the loss of funds. In Keynesian economics, governments may have to inject cash into the system if leakage causes a shortage of capital.\(1) Taxes:The main taxes are the personal and corporate income taxes and Goods and Services Tax (GST), a value-added tax. Both are applied at reasonably low rates to broad bases. The introduction of GST in 1986 marked a significant shift in the mix of taxation from direct to indirect tax. Personal income tax rate reductions in 2008, 2009 and 2010 reduced tax on individuals capital and labor income. The 2010 changes were accompanied by reductions in the company, superannuation scheme and Portfolio Investment Entity (PIE, a widely-held retail savings vehicle) rate to 28%. The changes were funded by increasing GST, better aligning tax and economic depreciation rates, and tightening the thin capitalization rules faced by foreign investors.

Personal Income Tax

All income other than most capital gains is taxed. Table 24 sets out the personal tax rates that have applied since 1 October 2010. Withholding taxes apply to wages and salaries and to interest income and dividends. Fringe benefits are taxed separately. Tax credits based on combined family income are available to families with children. A tax credit is also available to some independent earners who do not otherwise receive government support. The tax treatment of pension funds and other savings is TTE: contributions are made from Tax-paid income, fund earnings are taxed, and withdrawals are exempted.

Indirect Taxes

GST was raised from 12.5% to 15% on 1 October 2010, in conjunction with the income tax cuts described above. Financial services and housing rentals are exempt but otherwise New_ Zealands GST is very broad-based. Additional indirect taxes are applied to alcohol and tobacco products, petroleum fuels and gaming.

Company Taxes

As part of the 2010 tax reform package, the company tax rate was lowered from 30% to 28% with effect from 1 April 2011. Imputation credits are attached to dividends when tax is paid at the corporate level. Inter-corporate dividends (other than from wholly-owned subsidiaries) are taxed as income. Depreciation rates for new assets are based on the economic life of the asset. _ere is immediate deductibility against income of forestry and mineral mining development costs, petroleum exploration expenditure and of most agricultural development costs. _e reforms also included reducing the depreciation rate for most buildings to 0% from 1 April 2011.

International Taxation

The foreign-source income of New Zealand residents is subject to tax, with some exceptions. In particular, foreign dividends received by resident companies are exempt.

In common with other OECD countries, New Zealand has rules attributing certain income earned through foreign entities to its residents and taxing it accordingly. Residents holding a 10% or greater interest in a controlled foreign company, other than an Australian company, are taxed on accrual on passive income earned by the company. For all income years beginning on or after 1 July 2009, any active income earned through such a company is exempt. These rules are similar to those operating in other OECD countries.

Residents holding a 10% or greater interest in a foreign company not controlled from New Zealand are generally taxed on accrual for all income earned by the company. A Bill has been introduced to extend the active income exemption to these investments from 1 July 2012. Investments in the shares of foreign companies (except for some Australian listed companies) of less than 10% are taxed under the Fair Dividend Rate method. The investor is attributed income equal to 5% of the investments opening value. Dividend income is exempt. Where an individual can show the unrealized gain on their investments is less than 5%, the investor is taxed on this lower amount. The tax treatment of the New Zealand income of non-residents encourages inward capital flows where this is feasible. Interest payments to non-residents are subject either to non-resident withholding tax (in most cases at a 10% rate where a double tax agreement applies and 15% otherwise) or to a 2% levy. In the case of New Zealand government debt, the issuer absorbs the levy and no tax reduces the return to the investor. Parliament is considering whether to remove the 2% levy on certain bond issues.

Dividends paid to non-residents may also be subject to withholding taxes. Companies paying fully imputed dividends to non-resident investors with shareholdings of 10% or more do not have to apply any withholding tax. Companies paying fully imputed dividends to non-residents with shareholdings of less than 10% have to withhold tax at the rate of 15% but can claim a credit against their company tax, which they must then pass on to the investor. The net effect is that the maximum combined level of company tax and withholding tax on profits distributed to nonresidents will in most cases be the same as the company tax rate (28% from the start of the 2011/12 income year).

For unimputed dividends paid to non-residents, the rate of withholding tax is 30% unless this is reduced under a double tax agreement. Under most of New Zealands double tax agreements, the withholding rate for dividends is limited to 15%. Recently, the government has begun including lower limits in some of its double tax agreements for dividends paid in respect of shareholdings of 10%. For example, in the agreements with Australia and the United States, the rate of withholding tax on dividends is now limited to zero for shareholdings in excess of 80% and 5% for shareholdings of 10% or more. Lower limits are expected to be incorporated into other double tax agreements over time.

The government has implemented transfer pricing and thin capitalization regimes. It has recently abolished relief for New Zealand tax on offshore income derived by New Zealand companies on behalf of non-residents as these rules had led to tax avoidance.

(2) SavingsSaving is defined as deferred consumption and can be calculated as current income less current expenditure. This is often referred to as the flow approach. Saving (flow method) = Current income Current expenditureKey factsIn the year ended March 2012: Current price gross domestic product (GDP) increased 3.7 percent, while GDP per capita increased2.9 percent. National disposable income increased 3.9 percent, with compensation of employees (mainly wages and salaries) up 4.0 percent and business profits (gross operating surplus) up 1.7 percent. Final consumption expenditure increased 4.8 percent, with household spending up 5.0 percent. Investment in fixed assets (gross fixed capital formation) increased 0.7 percent, with a decrease in residential and non-residential building offset by increases in plant, machinery, and equipment, and other construction (infrastructure). National saving was $1.4 billion, compared with $2.8 billion in 2011. Household saving decreased to negative $144 million. Government saving increased $0.6 billion but remains negative at -$2.5 billion.

The household saving rate is the difference between the disposableincomeand expenditure of households, as a percentage of disposableincome.National saving down to $1.4 billion

National saving (saving by the domestic sectors) decreased $1.3 billion in 2012 to $1.4 billion.Household saving was slightly negative (-$144 million), with household consumption edging above disposable income. General government saving for 2012 was up from 2011, but expenditure exceeded income by $2.5 billion.It should be noted that the implementation of FISIM has no effect on national saving, or on saving for any of the sectors, even though it increases GDP.

Investment up, despite fall in residential building

Investment in fixed assets rose 0.7 percent in 2012, compared with a rise of 2.1 percent in 2011.The 2012 investment level is still $5.1 billion below the $42.4 billion peak of 2008. Government investment in fixed assets rose 2.0 percent, while private investment remained almost unchanged (up 0.2 percent).Investment in residential buildings fell 9.6 percent in 2012. Investment in non-residential buildings also fell (down 6.6 percent). This fall was more than offset by increases in plant, machinery, and equipment, up 8.5 percent, and other construction (infrastructure), up 10.1 percent.Inventories increased for the second year in a row, with a build-up of $1.8 billion in 2012, following a previous build-up of $1.1 billion in 2011.

Household saving drops slightly

Households continued to almost match their income and spending, which is a turnaround from a period of dissaving before 2010. In 2012 household spending outweighed income by $144 million. On average, over the last 10 years household spending exceeded income by $4.0 billion.Household spending rose 5.0 percent, up from $114.5 billion to $120.3 billion, outpacing disposable income. Disposable income increased 4.8 percent to $120.1 billion. The increase in household spending was partly due to the increase in goods and services tax (GST), from 12.5 percent to 15 percent in October 2010.Compensation of employees rose 4.0 percent, and was an important contributor to the increase in disposable income.Entrepreneurial income increased 1.1 percent in 2012, following an increase of 19.1 percent in the previous year. Entrepreneurial income has recovered after the decline in 2009, which reflected the economic downturn caused by the global financial crisis. Investment income also showed signs of recovery, increasing 7.5 percent in 2012. This followed two years of decline, down 11.0 percent in 2010 and down 11.1 percent in 2011.Social assistance benefits in cash continue to increase as economic uncertainty remains. These were up 5.9 percent in 2012, compared with an increase of 4.9 percent in the previous year.

General government saving trend continuesSaving for general government (local and central government) improved $0.6 billion in 2012 but remained negative.The improvement in saving was due to an increase in central government disposable income (up 5.6 percent). Taxes received by local and central government increased to $62.4 billion, up 4.4 percent, in 2012.In comparison, spending by local and central government was up 4.2 percent, in part reflecting increased expenditure related to the Canterbury earthquakes. Central government spending increased 3.2 percent, from $35.1 billion to $36.2 billion in 2012. Local government spending increased 11.9 percent, up $0.6 billion to $5.3 billion.General government investment in fixed assets increased 0.9 percent, with an increase in local government investment offset by a decline in central government.

(3) IMPORTSImports in New Zealand increased to 4.20 Billion NZD in October of 2012 from 4.10 Billion NZD in September of 2012. Imports in New Zealand are reported by the Statistics New Zealand. Historically, from 1960 until 2012, New Zealand Imports averaged 1.3 Billion NZD reaching an all time high of 4.8 Billion NZD in October of 2008 and a record low of 0.0 Billion NZD in April of 1960. New Zealand imports mainly machinery and equipment, vehicles and aircraft, petroleum, electronics, textiles and plastics. Its major import partners are: Australia, European Union, China, United States and Japan. This page includes a chart with historical data for New Zealand Imports.

Australia and China each contributed 16 percent of New Zealands total import value, followed by the United States with 11 percent.Main import commodities20112006

NZ$(million)

Petroleum and products 7,2365,240

Mechanical machinery and equipment 5,4875,150

Vehicles, parts, and accessories4,2705,006

Electrical machinery and equipment 3,890(1)3,340

Textiles and textile articles2,0771,768

Plastics and plastic articles 1,645 1,432

Aircraft and parts 1,4391,889

Optical, medical, and measuring equipment 1,373 1,159

Total all commodities45,07339,040

1. Values exclude confidential data.

The future of the economy of New ZealandA deteriorating global economy is weakening demand and returns for products from New Zealand's pillar primary sector. In its half-year update to the annual Situation and Outlook for Primary Industries report, which was published in June, the ministry said continuing economic slowdown, particularly in traditional European Union markets, was causing weaker demand for some New Zealand products, such as lamb.

The falling demand coincided with strong pastoral production so far in the 2012-2013 season.This is partly due to favorable climatic conditions during the previous season, which left breeding stock in good condition, and also ongoing expansion of the dairy herd.The strengthening of the New Zealand dollar against most major trading currencies in recent months was also having a dampening effect on farm-gate returns for primary produce.As a result, total primary sector export revenue for the year to June 2013 was forecast to be around NZ$27.5 billion ($2. 08 billion), down 5 percent on the previous year's NZ$29. 2 billion.

The economic uncertainty in the developed world and weaker demand growth from emerging markets were likely to constrain future increases in international dairy prices.

While US droughts were expected to support beef export revenues, lamb export revenue was expected to fall by 17 percent to NZ$1.91 billion in the year to 2013.

Wool export revenue was expected to fall by 23 percent to NZ$580 million over the same period due to lower export prices and weakening demand.

The value of forestry exports was forecast to slip from NZ$4.4 billion to NZ$4.1 billion due to lower prices and a strong exchange rate, but export volumes would remain stable.

Horticultural exports were on track to reach NZ$3.5 billion in export earnings in the year to March 2013, with higher in-market prices expected to offset lower volumes of kiwifruit and wine.

At the end of November, 68 percent of New Zealand kiwifruit orchards were known to have the vine-killing Psa (Pseudomonas syringae pv. Actinidiae) bacterium, up from 26 percent a year ago.

As a result, lower export kiwifruit crop was expected in the year ending March 2014.

The Governments financial position is weaker than expected and, when benchmarked against other OECD economies, the New Zealand economy is being managed poorly.Treasuryfigures released in the Half Year Economic and Fiscal Update 2012 show that forecast growth will be lower, unemployment will remain high until 2015/16, while the current account deficit and net international investment position will continue to worsen.Parliamentary Library research commissioned by the Green Party shows that the New Zealand economy has performed relatively worse than the majority of countries in the OECD since 2009 the trough of the global financial crisis. The data shows New Zealand scored 18th out of the 34 OECD countries for GDP growth, 22nd for changes in unemployment, 30th for the current account deficit, 28th for national savings growth, and 23rd for government debt.By nearly all measures of traditional economic success growth, employment, the current account deficit, national savings, and government debt New Zealand has performed relatively poorly when compared to the rest of the OECD.The National Government has made poor economic choices that have left the economy and the Governments accounts worse off.Tax cuts for upper income earners were very expensive, did little to promote growth, and now make it more difficult for the Government to achieve a fiscal surplus.Nationals failure to introduce a comprehensive tax on capital gains (excluding the family home) has not helped the Governments accounts and failed to incentivise savings and investment in the productive economy.Spending $12 billion on new motorways with poor economic returns is another example of Nationals failure to invest smartly in infrastructure to create jobs and secure our future prosperity.

BHUTAN ()

Bhutan has a population of 691,141 and was for long ruled by a monarchy. Bhutan held its first democratic elections in March 2008. Its total land area is 38,394 sq. km. Capital of Bhutan is Thimphu. The national language is Bhutanese (Dzongkha), one of 53 languages in theTibetan languagefamily. The script, here calledChhokey("Dharma Language"), is identical to classical Tibetan. In the schools English is the medium of instruction and Dzongkha is taught as the national language. The assessment ofgross national happiness was designed in an attempt to define an indicator that measures quality of lifeor social progress in moreholisticand psychological terms than only the economic indicator ofgross domestic product (GDP). In 2006, based on a global survey,Business Weekrated Bhutan thehappiest countryin Asia and the eighth-happiest in the world.Bhutans 10th five-year plan (2008-2013) aims to develop the countrys economy in the rural, regional and private sectors. The Bhutanese economy has flourished in recent times due to trade agreements with India, Bangladesh and other SAARC nations. The economy ofBhutan, one of the worlds smallest and least developed, is based onagricultureand forestry, which provide the main livelihood for more than 60% of the population. Agriculture consists largely ofsubsistence farmingandanimal husbandry. Rugged mountains dominate the terrain and make the building of roads and other infrastructure difficult and expensive. After India, Bangladesh is Bhutans second largest trade partner. Bhutan is member of the South Asian Free Trade Agreement (SAFTA) and has applied for membership of the World Trade Organization (WTO).Each economic program takes into account the government's desire to protect the country's environment and cultural traditions. Hydropowerexports to India have boosted Bhutan's overall growth, even thoughGDPfell in 2008 as a result of a slowdown in India, its predominant export market.Real economic growth is estimated to have recovered from 5.7% in FY2008/09 to 8.1% in FY2010/11. This robust performance came mainly from a 10 percent growth in the industrial sector, spurred by construction activities related to the hydropower projects. The services sector also grew at an impressive 8 percent, with tourism rebounding from the decline seen just two years earlier. By contrast, the agricultural sector performed less well, growing only at around 1.8 percent. The healthy growth rates in FY2010/11 closely track the averages for the past decade.This is a chart of trend of gross domestic product of Bhutan at market prices by theInternational Monetary Fund:YearGDP (millions ofBTN)GDP (millions of USD)

19852,166175

19904,877279

19959,531294

200020,060460

200536,915828

20081280

Bhutans overall macroeconomic outlook remains bright. Real GDP growth for the remainder of the 10FYP period is projected to be around 8 percent. The hydropower sector remains the key driver, given the planned expansion in electricity generation capacity. In the construction phase, projects will boost growth via the construction sector; once on stream, they will contribute through power generation. The current account deficit is estimated to widen significantly as new hydropower projects are under construction. However, adequate external financing is likely to result in overall surpluses and adequate international reserve cover.

INDIA and BHUTANThebilateral relationsbetween theHimalayanKingdom of Bhutanand theRepublic of Indiahave been traditionally close. India remains influential over Bhutan's foreign policy, defense and commerce.The economy is closely aligned withIndia's through strong trade and monetary links and dependence on India's financial assistance. Most production in the industrial sector is of the cottage industry type. Most development projects, such as road construction, rely on Indianmigrant labor. Model education, social, and environment programs are underway with support from multilateral development organizations.On August 8, 1949 Bhutan and India signed the Treaty of Friendship, calling for peace between the two nations and non-interference in each other's internal affairs. However, Bhutan agreed to let India "guide" its foreign policy and both nations would consult each other closely on foreign and defence affairs. The treaty also establishedfree tradeandextraditionprotocols. Economic cooperation between India and Bhutan began in the 1960s after former Prime Minister Nehrus visit in 1958. Indian economic assistance over the last four decades has helped Bhutan achieve self-sufficiency in many areas. Annual plan talks between the Government of India (GoI) and the Royal Government of Bhutan (RGoB) is the mechanism for planning, implementing and monitoring Indian aid. Indias development cooperation is in tune with His Majestys concept of Gross National Happiness, Bhutans own priorities and the approach of calibrated sustainable development. Over the years, Indias assistance has focused on infrastructure development such as roads, bridges, telecommunications, the Bhutan Broadcasting Corporation, schools, hospitals, airport, etc.

Trade relations with India:Bhutan has a fixed exchange rate with the Indian rupee and both countries share a free trade agreement. Bhutan and India signed a 'free trade' accord in 2008, which additionally allowed Bhutanese imports and exports from third markets to transit India withouttariffs. India is Bhutan's largest trading partner, absorbing over 90 percent of Bhutans exports consisting of fruit, electricity, timber, spices and gemstones. Imports, of which nearly 75 percent originate in India, consist primarily of petroleum products, machinery and vehicles. Due to Bhutan's landlocked position, access to India's large market is indeed an asset for Bhutan given its small domestic market. In recent years Bhutan has been facing a significant rupee crunch. This is because Bhutan imports most of what it consumes and India is the main source (80-90%) of Bhutans imports as well as exports. Almost 96% of all food and processed foods and beverage imports are derived from IndiaFurnished below are lists of the top 10 commodities imported from India and Exported to India for the year 2010.Top 10 Commodities Imported from India for the Year: 2010

CommoditiesImport value (Nu.)

1Other light oils and preparations (HSD)2,803,878,885.00

2Ferrous products obtained by direct reduction of iron ore1,232,700,609.00

3Motor spirit (gasoline) including aviation spirit969,202,242.00

4Dumpers designed for off-highway use919,392,258.00

5Rice846,925,460.00

6Coke and Semi-coke738,991,808.00

7Other710,331,951.00

8Manganese ores and concentrates, including ferrugi599,281,377.00

9Coal, other586,157,525.00

10Cars, petrol from 1000 cc to 1500 cc462,092,720.00

11Others19,460,151,332.00

Total29,329,106,167.00

Top 10 Commodities Exported to India for the Year: 2010

Sl.NoCommoditiesExport Value (Nu.)

1Ferrous-Silicon5,471,292,980.00

2Other1,723,883,028.00

3Of Calcium965,824,126.00

4Portland Pozzolana cement813,233,155.00

5Manganese and articles thereof, including waste an765,612,800.00

6Bars and rods of iron or nonalloy steel, twisted738,701,845.00

7Ingots595,055,232.00

8Portland slag cement478,828,370.00

9Of Silicon449,766,865.00

10Dolomite, not calcined or sintered, Chips414,547,674.00

11Others3,172,680,824.00

Total15,589,426,899.00

BHUTAN and WORLDChinaEven though Bhutan and China share a border, they do not have diplomatic relations, although border talks between the two nations has occurred.NepalThese two countries established diplomatic relations in 1983. Nepal and Bhutan are currently negotiating to resolve a 13-year-old refugee situation, in which 100,000 refugees are residing in seven UNHCR camps in Nepal. Most of the refugees claim they are Bhutanese citizens, while Bhutan alleges that most are non-nationals or "voluntary emigrants," who forfeited their citizenship rights. In 2003, a joint Bhutan-Nepal verification team categorized refugees from one camp into four groups. A repatriation process is expected to begin in 2004.UnitedNationsBhutan became a member of the United Nations in 1971. Bhutan does not have diplomatic relations with any of the permanent members of the U.N. Security Council. Bhutan was elected to the UN Commission on Human Rights in 2003 and will serve until 2006.United States of America

Other CountriesBhutan enjoys diplomatic relations with seven European nations, which form The "Friends of Bhutan" group, together with Japan. These countries are Switzerland, Denmark, Sweden, Norway, the Netherlands, Finland, and Austria. Also known as donor nations, they contribute generously to Bhutanese development and social programs. Bhutan also has diplomatic relations with South Korea, Canada, Australia, Kuwait, Thailand, Bahrain, Bangladesh, the Maldives, Sri Lanka, and Pakistan.Circular FlowIneconomics, the termscircular flowrefer to a simple economic model which describes the reciprocal circulation of income between producers and consumers.In the circular flow model, the inter-dependent entities of producer and consumer are referred to as "firms" and "households" respectively and provide each other with factors in order to facilitate the flow of income.Firms provide consumers with goods and services in exchange for consumer expenditure and "factors of production" from households. More complete and realistic circular flow models are more complex. They would explicitly include the roles of government and financial markets, along with imports and exports.The basic circular flow of income model consists of seven assumptions:1. The economy consists of two sectors:householdsandfirms.2. Households spend all of theirincome(Y) ongoods and servicesorconsumption(C). There is no saving (S).3. All output (O) produced by firms is purchased by households through theirexpenditure(E).4. There is nofinancialsector.5. There is nogovernmentsector.6. There is nooverseassector.7. It is a closed economy with no exports or imports.The five sector model of the circular flow is a more realistic representation of the economy. Unlike the two-sector model where there are six assumptions the five sector circular flow relaxes all six assumptions. Since the first assumption is relaxed there are three more sectors introduced. The first is the Financial Sector that consists of banks and non-bank intermediaries who engage in the borrowing (savings from households) and lending of money. In terms of the circular flow of income model the leakage that financial institutions provide in the economy is the option for households to save their money. This is a leakage because the saved money cannot be spent in the economy and thus is an idle asset that means not all output will be purchased. The injection that the financial sector provides into the economy is investment (I) into the business/firms sector.The next sector introduced into the circular flow is the Government Sector that consists of the economic activities of local, state and federal governments. The leakage that the Government sector provides is through the collection of revenue through Taxes (T) that is provided by households and firms to the government. For this reason they are a leakage because it is a leakage out of the current income thus reducing the expenditure on current goods and services. The injection provided by the government sector is Government spending (G) that provides collective services and welfare payments to the community.

The final sector in the circular flow is the overseas sector which transforms the model from a closed economy to an open economy. The main leakage from this sector are imports (M), which represent spending by residents into the rest of the world. The main injection provided by this sector is the exports of goods and services which generate income for the exporters from overseas residents. An example of the use of the overseas sector is Australia exporting wool to China; China pays the exporter of the wool (the farmer) therefore more money enters the economy thus making it an injection.Savings + Taxes + Imports = Investment + Government Spending + ExportsORS + T + M = I + G + X.

In terms of thefive sector circular flow model,the state of equilibrium occurs when the total leakages are equal to the total injections that occur in the economy. This can be shown as:

IncomeProduction, consumption expenditure and generation of income are the three basic economic activities of an economy that go on endlessly and are titled as circular flow of income. Production gives rise to income, income gives rise to demand for goods and services; such a demand gives rise to expenditure and expenditure induces for further production. The whole process forms the basis for circular flow of income and related activities- production, income and expenditure are known as phases or stages of circular flow of income.

Production

Consumption Injections Leakages Investment Savings Exports ImportsGovernment ExpenditureTaxesProductionBhutan's economy is based onagriculture, forestry, tourism and the sale ofhydroelectric powerto India. Agriculture provides the main livelihood for more than 80 percent of the population. Bhutanese agriculture mainly incorporates subsistence farming and the breeding and raising of livestock animals. This means that almost 100% of all Bhutanese agricultural production is consumed by the farmers themselves or only locally traded.Consequently, only a small percentage of the country's agricultural production contributes to the nations GDP. This focus on subsistence family farming results in the fact that almost 60% of the Bhutanese people do not contribute to Bhutans national economy. These non-export agricultural products include rice, corn, root vegetables, citrus fruit, food grains, dairy products, and eggs.Among the agricultural lands in the nation, an estimated 21% are wetland (irrigated), approximately 43% are dry land(rain fed), nearly 27% are used forshifting cultivation, approximately 8% are used for orchards and 1% are kitchen gardens. The primary goals of agriculture in Bhutan are to raise theper capita incomeof thepeopleliving in rural areas, to enhance self-sufficiency in staple crops, and to increase the productivity per unit of farm labor and agricultural land. Agriculture is hampered due to irrigation problem, rough terrain, poor soil quality and limited number of arable lands. But several other factors have contributed in the development of agriculture. These factors include improved quality of various cereal seeds, oil seeds, and vegetable seeds, use of fertilizers, mechanization process and trained agricultural experts.Hydroelectricity has been a primary focus of development in the kingdom under itsFive-Year Plans. In cooperation withIndia,Bhutanhas undertaken severalhydroelectric projects whose output is traded between the countries. ThoughBhutan's manyhydroelectric plantsprovide energy far in excess of its needs in the summer, dry winters and increased fuel demand makes the kingdom a marginal net importer of energy fromIndia.Bhutan operates four majorhydroelectric facilities, several small and mini hydroelectric generators, and a handful of further sites in development. Many of the small and mini hydropower plants in Bhutan serve remote villages that remain disconnected from the main power grid. Almost all of hydroelectric plants in Bhutan generate power throughrun-of-the-river hydroelectricity. Earlier international efforts were mostly supported by grants fromIndia, though later projects became majority loan-based.Other sovereign and multinational contributors, including the government ofAustriaand theAsian Development Bank, have also funded and developed Bhutan's hydroelectric projects. In the early 2010s, Bhutan began to shift its focus to public-private partnerships for future development,however the process and requirements have operated to exclude many Bhutanese contracting firms.

As of 2011, the Bhutanese government supplied electricity to 60 percent of rural households, a significant increase from about 20 percent in 2003. About 2,500 people used solar power throughout Bhutan. Due to a technologically underdeveloped industrial sector, Bhutan cannot sustain electricity supplies by itself. With increasing development projects, the kingdom consumes 125 times more electricity than it domestically produces. Additionally, it imports nearly five times more electricity than it exports. However, a future source of revenue and employment for Bhutan actually is its export in electricity. With its newly developed hydropower plants, Bhutan exports clean energy mainly to India.In the face ofclimate changeand growing energy demands, Bhutan has sought additional energy security through developing itsalternative energysources. Solar energyin Bhutan has received direct investment from domestic and international sources. In 2010,Asian Development Bankmade a grant of overUSD21 million for electrification of rural homes, aiming to provide power both on-grid and off-grid. In 2010, pilotwindmillprograms were implemented to investigate the feasibility of usingwind energyto alleviate hydropower drops during the dry winter seasons.

Forestry is one ofBhutan's significant natural resources in the late twentieth century. Bhutan's location in the easternHimalayas, with its subtropical plains andalpineterrain, gives it more rainfall than its neighbors to the west, a factor greatly facilitating forest growth. The forests contain numerousdeciduousandevergreenspecies, ranging from tropical hardwoods to predominantlyoakandpineforests.Beforehydroelectric powerand other modern energy sources were available, wood was the almost exclusive source of fuel for heating, cooking, and lighting. The provision ofelectricity, as well as better regulation of fuel wood collectors and more aggressive reforestation projects, was seen in the 1980s as a key factor in forest conservation. Because affordable electricity was not available throughout the country, the government established fuel wood plantations near villages to accommodate daily needs and to promote forest conservation.

According toUNstatistics, in the decade between 1978 and 1987 Bhutan harvested an average of nearly 3.2 million cubic meters of round wood and produced 5,000 cubic meters of sawn wood per year. Of this total, nearly 80 percent was for commercial use (paper pulp,veneers,plywood,particle board, andfirewood), and the remainder was for housing construction and public works.

Tourism in Bhutanbegan in 1974, when theGovernment of Bhutan, in an effort to raise revenue and to promote the country's unique culture and traditions to the outside world, opened its isolated country to foreigners. In 1974, 287 tourists visitedBhutan. Since then the number of tourists visiting Bhutan has increased to 2,850 in 1992, rising dramatically to 7,158 in 1999. By the late 1980s tourism contributed over US$2 million in annual revenue.Despite being open to foreigners, the government is acutely aware of the environmental impact tourists can have on Bhutan's unique and virtually unspoiled landscape and culture. Therefore, they have restricted the level of tourist activity from the start, preferring higher quality tourism. Until 1991, the Bhutan Tourism Corporation (BTC), a quasi-autonomous and self-financing body, implemented the government's tourism policy. The Bhutanese government, however, privatized the Corporation in October 1991, facilitating private sector investment and activity. As a result, today over 75 licensed tourist companies operate in the country.

IncomeThough Bhutan's economy is one of the world's smallest, it has grown rapidly in recent years, by eight percent in 2005 and 14 percent in 2006. In 2007, Bhutan had the second fastest growingeconomyin the world, with an annual economic growth rate of 22.4 percent. This was mainly due to the commissioning of the giganticTataHydroelectricity project.GDP per capita (nominal): $2121GDP per capita (PPP) : $6112Bhutan's economy is based on: Agriculture Forestry Tourism Sale ofhydroelectric powerto India Agriculture provides the main livelihood for more than 80 percent of the population. Agrarianpractices consist largely ofsubsistence farmingandanimal husbandry. Handicrafts, particularly weaving and the manufacture of religious art for home altars, are a smallcottage industry. The industrial sector is in a nascent stage, and though most production comes from cottage industry, larger industries are being encouraged and some industries such ascement,steel andferroalloyhave been set up. Most development projects, such as road construction, rely on Indian contract labour. Agricultural produce includes rice, chillies, dairy (some yak, mostly cow) products, buckwheat, barley, root crops, apples, and citrus and maize at lower elevations. Industries include cement,woodproducts, processed fruits, alcoholic beverages andcalcium carbide.

Exports: Electricity Cardamom Gypsum Timber Handicrafts Cement Fruit Precious stones Spices

GDP - composition by sector: Agriculture:16.7% Industry:45.4% Services:37.9% Population below poverty line: 23.2%Household income or consumption by percentage share: lowest 10%:2.3% highest 10%:Budget:

Revenues:$730.7 million Expenditures:$809.9 million

Taxes and other revenue:

49% of GDP

ConsumptionConsumption is one of the key components in circular flow model. It is directly proportional with the level of income of a consumer. The primary source of income is farm enterprises, followed closely by wages. In urban areas, seven out of 10 households primary source of income was wages and, for about 20 percent of households, business was the main income source. One in five urban households had secondary sources of income. In rural areas, three-fifths earned mainly from their farms and two in five had more than one source of income. Bhutanese spent almost one third of their income in meeting rental, energy and household operation expenses according to the 2007 Bhutan Living Standard Survey prepared by the National Statistical Bureau.The main sources of household income (by expenditure) were farm enterprises and wages (including religious fees paid to monks). According to the survey, farming was a source of income for about 46 % of the Bhutanese and salary and wages the main income source for about 34 %. About 8.4 % of the Bhutanese earn income though private businesses which include small retail shops to big construction houses. Little more than 3 % earned income through rent, real estate and selling of assets. Remittances as a source of income was around 2.5 % and includes money sent within the country from the towns to the villages as well as remittances coming in from abroad. Pensions as an income source was a meagre 0.22 %. Other sources of income was about six percent. Hence above mentioned income will have direct impact on consumption. Household consumption can be either in form of non food expenditure and food expenditures.The major consumption is in the form of household expenditure which could be obtained by adding the various goods and services purchased consumed from own production and received as gifts. The various components of consumption expenditure are food items and non food items. Consumption expenditures do not include investments expenditures nor expenditures on taxes.The major items of food consumption in Bhutan are as follows: Rice Cereals, pulses Dairy products Meat, Fish Fruits, Vegetables Tea and coffee Cooking Oil Spices and seasonings Alcoholic beverages Food consumed outside home

The major items of non food consumption in Bhutan are as follows: Clothing and footwear Transport Communication Furnishing and equipment Recreations Educational expenses Rent/Energy for home household operations Miscellaneous.

Besides above mentioned expenses health expenses is also a part of expenditure .The surveys conducted by the National Statistical Bureau (NSB) reveal that even though the health services are provided free of cost, household do end up paying for expenses as well as for purchase of medicines and related supplies in the country. The table below shows the income of Bhutanese people in percentage:Sources of income Percentage

Farming46

Salary and wages34

Private businesses8.4

Remittances2.5

Pensions0.2

Others6

The below mentioned figure shows the consumption of Bhutanese people in various food and non food items. Expenditure items(food and non food)Percentage

Rental expense13

Household expenditures12

Meat and vegetables3

Rice and dairy products14

Alchoalic beverages>2

Urban areas>1

Rural areas3

Tobacco and doma1

Furnishing and equipments5

Transport and communications2

Education>3

Household operation>3

Recreation1

Miscellaneous expenditure10

The main sources of household income (by expenditure) were farm enterprises and wages (including religious fees paid to monks). According to the survey, farming was a source of income for about 46 % of the Bhutanese and salary and wages the main income source for about 34 %. About 8.4 % of the Bhutanese earn income though private businesses which include small retail shops to big construction houses. Little more than 3 % earned income through rent, real estate and selling of assets. Remittances as a source of income was around 2.5 % and includes money sent within the country from the towns to the villages as well as remittances coming in from abroad. Pensions as anRental expenses by itself was about 13 % and household energy use (which includes electricity, gas, kerosene and firewood) around 12 % and household operation costs more than 3 %. Clothing and footwear took up about 10 %, furnishing and equipment about 5 % and transport and communications less than 5 %. Miscellaneous expenditure which figures at more than 11 % has not been specified but could include items like expenses on buying vehicles and land in the urban areas and cattle and agricultural tools in the rural areas. With health and education provided free by the government, expenses in these areas was under 2 % and 3 %. Expenses on recreation was the lowest at 1 % on the national average and about 2.5 % in the urban areas. On food expenses which was about 37 % of overall expenditure, about 14 % was spent in equal measure on rice and dairy products indicative of the Bhutanese dietary habits. An average 3 % each was spent on meat and vegetables and a little over 2 % on alcoholic beverages. Expenses on alcohol figure less than one % in urban areas and nearly 3 % in the rural Bhutan. Consumption expenditure on tobacco and doma figure less than one % (0.84 %).

Leakages and Injections: (i) Savings and Investments : Savings: The value for Gross domestic savings (current US$) in Bhutan was $429,748,000.00 as of 2009. Over the past 28 years, the value for this indicator has fluctuated between $429,748,000.00 in 2009 and ($10,883,740.00) in 1981. The value for Gross domestic savings (current LCU) in Bhutan was 20,804,100,000.00 as of 2009. As the graph below shows, over the past 28 years this indicator reached a maximum value of 20,804,100,000.00 in 2009 and a minimum value of -103,850,700.00 in 1983.

YEAR DETAILS

Gross national savings as Percent of GDP in

19807.943199123.689200138.459

19817.047199218.155200238.414

19829.273199330.865200338.001

19838.43199442.249200436.368

19847.433199540.918200529.62

198513.555199633.64200641.218

19868.937199722.899200737.658

198716.964199819.719200832.823

198817.476199921.52200936.442

198923200025.385201036.122

199029.107201137.369

Investment: In its attempt to integrate into the world economy, Bhutan has taken steps towards encouraging and facilitating the development of the private sector. The country is in the preparation process to access to WTO and the Foreign Direct Investment Policy was introduced in 2002. This policy replaced the previous ad-hoc system of foreign investment approval and it allows the foreign investors to hold up to 70 per cent equity, sets a minimum project size of US$ 1 million in the manufacturing sector and US$ 500,000 in the services sector, and opens up 14 sectors, including manufacturing and tourism for possible foreign participation. Foreign direct investment (FDI) is defined as an investment made in convertible currency and where at least 20 per cent is foreign owned. This minimum requirement is aimed at protecting local cottage and small enterprises.Investors are required to apply to the Ministry of Trade and Industry for an FDI Registration Certificate stating the conditions that must be fulfilled by the investors. This Certificate is the initial condition before investors acquire other necessary permits and licences. In addition, all commercial and industrial activities operating in the country are required to obtain an operating license from the Ministry of Trade and Industry. All foreign investments must register with the Registrar of Companies and follow the regulations as stipulated in the Companies Act, 2000.In September 2002, the Ministry of Finance announced tax holidays and incentives in the three following categories, of which a business entity is eligible for only one: Tax holiday from corporate income tax (CIT) and business income tax (BIT) for newly established business entities (established between 1 January 2003 and 30 June 2007) in manufacturing industries including those in the interior regions, information technology training and vocational training institutes, hotels, schools and auto-mechanical workshops in the interior regions; BIT/CIT exemption for export income earned in convertible currency accruing from 1 January 2003 by manufacturing industries, IT service industries and agriculture produce exporters; and Re-investment allowance for incorporated companies: 20 per cent of total re-investment, from 1 January 2003 to 30 June 2007.In addition, other incentives include the following: Sales tax and customs duty are not collected on plant, machinery and raw materials (as mentioned in Part Two); CIT/BIT is to be exempt for income in convertible currency by manufacturing industries, IT industries or services and agricultural produce; and The tax-deductible salary limits will not apply to incorporated companies.

(ii) Imports and Exports :

The details of both the imports as well as exports in Bhutan are reported by the Royal Monetary Authority of Bhutan. According to the Annual report 2010/11 published by the same, the overall exports increased by 18.7 % whereas the overall imports increased by 36.5%; driven by a huge jump in imports from India (from Nu.28.3 billion in FY 2009/10 to Nu.40.6 billion). The details about both the imports and exports will be discussed further.

Imports: Imports in Bhutan increased to 53705 Million BTN in 2011 from 39340 Million BTN in 2010. Historically, from 1991 until 2011, Bhutan Imports averaged 7873.3 Million BTN reaching an all time high of 53705.0 Million BTN in December of 2011 and a record low of -11123.5 Million BTN in December of 2004. Bhutan mainly imports oil and fuels, base metals, machinery and electrical appliances, vehicles, wood and food. Bhutan's main imports partner is India, accounting for approximately 80 percent of total imports. Other imports partners include South Korea, Thailand, Singapore, Japan, China and Nepal. Over the last decade, Bhutan has experienced a deficit in trade balance due to the increase in imports of machinery and industrial equipment. Furnished below is a list of Bhutans top ten trading partners in term of imports (2010)-COUNTRIESValue in Nu.(Million)

INDIA29329.11

SOUTH KOREA2004.7

Thailand988.1

SINGAPORE903.04

JAPAN845.11

CHINA611.03

NEPAL585.5

INDONESIA567.69

SWEDEN550.3

GERMANY362.01

TOP TENIMPORT FROM COUNTRIES OTHER THAN INDIA (2010)

CommodityValue in Nu. (Million)

1Machinery and Mechanical Appliances4461.2

2Base Metals and Articles of Base Metal2571.05

3Vehicle, Aircraft, Vessels and associated transport equipment1024.93

4Plastic and Articles thereof410.67

5Optical, Photographic, Cinematographic, Measuring, Checking,P recision,Medical or Surgical Instrucment and appratus:clocks and watches and musical instruments; parts and accessories thereof309.79

6Products of the Chemical or allied Industries236.3

7Prepared Food Stuffs; Beverages, Spirits and Vinegar; Tobacco and Manufactured Tabacco Subtitutes.212.03

8Textiles and Textile Articles140.37

9Miscellaneous Manufactured Articles100.67

10Mineral Products80.92

Exports:Exports in Bhutan increased to 30160.10 Million BTN in 2011 from 25401.80 Million BTN in 2010. Historically, from 1991 until 2011, Bhutan Exports averaged 9725.9 Million BTN reaching an all-time high of 30160.1 Million BTN in December of 2011 and a record low of 1129.6 Million BTN in December of 1991. Hydropower remains Bhutans top export with a 35.5 percent share in total exports in 2010. Other exports include metals, chemical products, food, wood and rubber. Bhutan's main exports partner is India, accounting for around 90 percent of total exports.Bhutan: Exports composition-2010

Furnished below is a list of Bhutans top ten trading partners in terms of exports (2010)-COUNTRIESValue in Nu.(Million)

INDIA15589.43

HONGKONG2188.29

BANGLADESH906.08

JAPAN132.47

NEPAL39.68

SINGAPORE19.6

ITALY15.47

USA7.59

THAILAND4.67

TAIWAN2.91

TOP TENEXPORT TO COUNTRIES OTHER THAN INDIA

CommodityValue in Nu. (Million)

1Machinery and Mechanical Appliances2146

2Vegetable Produts554.89

3Mineral Products408.79

4Base Metals and Articles of Base Metal190.84

5Prepared Food Stuffs; Beverages, Spirits and Vinegar; Tobacco and Manufactured Tobacco Substitutes.17.43

6Works of Arts, collectors' pieces and antiques1.94

7Miscellaneous Manufactured Articles1.16

8Pulp of wood or of other fibrous cellulosic material: Recovered(waste and scrap)paper or paperboard: paper and paperboard and articles thereof0.94

9Products of the Chemical or allied Industries0.56

10Animal and vegetable fats and oils and their cleavage products: prepared edible fats; animal or vegetable waxes0.2

(iii) Taxes and Government Expenditure:

Taxes:The Department of Revenue and Customs at the Ministry of Finance is responsible for structuring and implementing the tax system. There are three categories of tax: Direct tax (urban tax and rural tax): including corporate income tax and business income tax (30 per cent of net profit), property transfer (5 per cent), land and house tax, cattle tax; Indirect tax: including Bhutan Sales Tax, customs duty and excise tax; and Other taxes: including export tax on goods of primary form like timber, tax on motor vehicles, and royalties on forestry products, mines, minerals and Tourism industries. All companies registered with the Ministry of Trade and Industry, and business units holding trade license issued by the Ministry of Trade and Industry are liable for corporate income tax (CIT) and business income tax (BIT).CIT and BIT are levied at 30 per cent of the net profit of companies and businesses in each calendar year, and to be filed between January and March each year. Excise Tax is applicable to all domestically manufactured alcoholic beverages and aerated water, ranging from 20 to 60 per cent ad valorem at ex-factory price.Government Spending:Bhutans economic freedom score is 56.6, making its economy the 111th freest in the 2012 index. Its score has decreased 1.0 point from last year, primarily because of worsening government spending, labor freedom, and trade freedom. Bhutan is ranked 21st out of 41 countries in the Asia-Pacific region, and its overall score is below the global average.The foundations of economic freedom are relatively strong, with corruption present but under control, and new steps have been taken to ensure greater security for property rights. Recently, a higher priority has been placed on measures to diversify the economy, particularly in light of demographic shifts that will bring more young people into the labor market.Over the past decade, Bhutan has made progress in modernizing its economic structure and reducing poverty. The public sector, especially hydropower, has long been the main source of economic growth, but the government now recognizes that private-sector development include the inefficient regulatory framework, pervasive non-tariff barriers, and a rudimentary investment code. The financial sector remains small and without adequate regulation or supervision. The lack of access to financing precludes entrepreneurial growth.RULE OF LAW

Sources: http://www.heritage.org/index/country/bhutan http://www.economywatch.com/world_economy/bhutan/export-import.html http://world-economic-outlook.findthedata.org/l/627/Bhutan http://www.indianembassythimphu.bt/Indo-Bhutan%20Book/Pages/04%20India-Bhutan%20economic%20cooperation.pdf http://www.trade.gov.bt/ Royal monetary authority of Bhutan Annual report 2010/11