Enhancing the economy growth of

Puerto Rico Calculating the amount of fixed investment

needed to boost economic growth Prepared by

José I Alameda Lozada Ph.D.Economist and Professor at the UPR, Mayaguez

Main nominal GNP’s components

• GNP = Gross National Product, • C = Personal Consumption• G = Government Expenditures• I = Gross Domestic Investment• X= Sales to the rest of the world or Exports• M = Purchases from the rest of the world or Imports

GNP = C + G + I + (X –M)

Puerto Rico’s GNP Components, nominal prices2004 2005 2006 2007 2008 2009 2010 2011r 2012 2013 Avg growth 2006-13

Gross National Product, nominal prices $51,827 $54,862 $57,854 $60,643 $62,703 $63,618 $64,295 $65,721 $68,698 $70,740 2.78%Iimplict price deflactor 1954=100 722 750 787.1 835.1 889.5 937.7 982.8 1,021.80 1,058.60 1,086.40 4.75%Implict price deflator growth rate (1+g) 1.039 1.049 1.061 1.065 1.054 1.048 1.04 1.036 1.026 -0.28%

C = Personal consumption expenditures $44,256 $47,065 $50,149 $52,087 $54,554 $55,122 $56,784 $58,155 $60,966 $62,511 3.08%

G = Government consumption expenditures $9,101 $10,065 $10,330 $10,512 $10,518 $11,102 $10,842 $10,507 $10,785 $10,716 0.47%

I = Gross domestic investment, total $12,303 $12,249 $12,211 $11,988 $11,374 $10,054 $9,012 $10,105 $10,538 $9,983 -2.28% Change in inventories $342 $347 $378 $313 $399 $355 $94 $500 $181 $172

(X-M) = Net sales to the rest of the world -$13,833 -$14,517 -$14,835 -$13,944 -$13,742 -$12,660 -$12,343 -$13,046 -$13,591 -$12,470 -1.99%X = Sales to the rest of the world $66,393 $68,553 $72,625 $72,906 $76,613 $74,213 $74,310 $76,576 $74,743 $75,093 0.42%M = Purchases from the rest of the world $80,226 $83,070 $87,460 $86,850 $90,356 $86,873 $86,654 $89,622 $88,334 $87,562 0.01%

Main assumption of the model

• Re-grouping the components:

•GNP = (C + G) + (X –M) + I

Fixed average growth

rate

Fixed amount

Target Variable growth

rate

Main assumptions to forecast GNP 2014-2020• Assumptions under this model:• Inflation rate = 2%

• Fixed average growth rate

• Fixed amount

Avg growth rate C = Personal consumption expenditures 3.08%G = Government consumption expenditures 0.47%

Fixed Amount Assumption (millions $)(X-M) = Net sales to the rest of the world (12,469.7) Change in inventories 260.4

Investment Requirement to enhance

economic growth• Target variable = Gross Fixed Investment

• I = Change inventories + Gross Fixed Investment

• Changes inventories is assumed at 260 millions during 2014-2020.

• Gross Fixed Investment is the target. It means construction of tangible plant building, machinery and equipment, and infrastructure.

For an annual real growth rate of 4%

Items

avg grwt rate 2014 2015 2016 2017 2018 2019 2020

GNP , nominal million $ 6.00% 74,985 79,484 84,253 89,308 94,667 100,347 106,367

Impl price deflactor 2014=100 100.0 102.0 104.0 106.0 108.0 110.0 112.0

GNP real2014 prices, millions $74,985 $77,925 $81,012 $84,253 $87,654 $91,224 $94,971

GNP real rate of growth, annual 2014 prices ND 3.9% 4.0% 4.0% 4.0% 4.1% 4.1%

Puerto Rico’s investment requirements

2014 2015 2016 2017 2018 2019 2020 Invesment Requirements a/

Total Fixed Investment Requirements $11,991 $14,454 $17,125 $20,020 $23,152 $26,539 $30,198 $143,479 Construction $5,699 $6,870 $8,140 $9,516 $11,005 $12,614 $14,353 $68,197 Machinery and Equipment $6,291 $6,291 $6,291 $6,291 $6,291 $6,291 $6,291 $44,039

47.531% a/ millions of dollars

TOTAL INVESTMENT NEEDED FOR A 4% REAL GROWTH RATE DURING PERIOD 2014-2020 IS $143,500 MILLIONS

For an annual real growth rate of 5%

Items avg grwt rate 2014 2015 2016 2017 2018 2019 2020

GNP , nominal million $ 7.00% 75,692 80,991 86,660 92,726 99,217 106,162 113,594Impl price deflactor 2014=100 100.0 102.0 104.0 106.0 108.0 110.0 112.0

GNP real2014 prices, millions $75,692 $79,403 $83,327 $87,477 $91,868 $96,511 $101,423

GNP real rate of growth, annual 2014 prices 4.9% 4.9% 5.0% 5.0% 5.1% 5.1%

For an annual real growth rate of 5%

2014 2015 2016 2017 2018 2019 2020 Invesment Requirements a/

Total Fixed Investment Requirements $12,698 $15,960 $19,532 $23,438 $27,703 $32,355 $37,424 $169,111 Construction $6,035 $7,586 $9,284 $11,140 $13,168 $15,379 $17,788 $80,380 Machinery and Equipment $6,662 $6,662 $6,662 $6,662 $6,662 $6,662 $6,662 $46,637

47.531% a/ millions of dollars

TOTAL INVESTMENT NEEDED FOR A 5% REAL GROWTH RATE DURING PERIOD 2014-2020 IS $169,111 MILLIONS

Scenarios for different real growth rates

Real GNP Growth: 2014-2020 Invesment Requirements: 2014-2020 a/2% $95,1463% 118,8004% 143,5005% 169,100

a/ millions of dollars

In order to enhance steady-state economic growth process, the investment requirements in Puerto Rico are really high. Then, local authorities need to re-focus the source of investment or diversify countries portfolio.