The Impact of External Debt Towards Gdp: Evidence from Malaysia and Indonesia

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THE IMPACT OF EXTERNAL DEBT TOWARDS GDP: EVIDENCE FROM MALAYSIA AND INDONESIA

NURUL IZZATI BINTI MUHAMMAD

2015249914

SITI HAWA BINTI NORAZMAN

2015836646

BACHELOR IN BUSINESS ADMINISTRATION

(HONS) FINANCE

FACULTY OF BUSINESS MANAGEMENT

UNIVERSITI TEKNOLOGI MARA

PUNCAK ALAM

DECEMBER 2016

1. INTRODUCTION

1.1 Background of study

Economic growth can be defined as the changes happening to the products and services produced by a country in a given period of time. It can be measured in nominal or real terms, which is adjusted for inflation (Investopedia, 2016). The changes can be either positive or negative depending on the decrease or increase of previous data. Maintaining economic growth of a country can give positive effects on the national income which is increasing level of employment thus will higher the standard of living. Bundle all goods into two basic categories, consumer and capital goods is the simplest way to show economic growth (Economics Online, 2016).

Economic growth can be measured by the changes of real GDP in a particular period. GDP defined as one of the primary indicators that represent the total value of all goods and services produced in a certain period of time. There are three most common ways to measure growth of real GDP there are quarterly growth at an annual rate, the year-over-year growth rate and the annual average growth rate. When GDP increase, it means that the economic growth is quite beneficial to the citizen, economy and country and vice versa. Some of the beneficial is increase capital investment, benefit to the government, high rate of employment, enhance business confidence and improve living standard.

There are some factors that influence economic growth, one of them is debt. Generally, debt is amount owed to a person or organization for funds borrowed. Loan note, bond and mortgage are the example items represented debt. According to (Abu Bakar & Hassan, 2008), debt or borrowing is vital for financing development, whereby a country borrows to boost long-term productivity and economic output as well as to advance in human development. Relate to this situation, debt is used in income generating hence generate production and sustaining economic development as well.

Debt can be internal and external referring to the total outstanding borrowings of a central government. Based on the research, external debt relates to the owing to foreign creditors, debt incurred in financing its expenditure. External debt also can be clearly said as the share of debt of a country that has been borrowed from foreign investors including commercial banks, governments or international financial institutions. Usually loan together with interest must be paid in the currency in which the loan is made. Borrowing country can sell and export to the country of the lender in order to obtain the needed currency. If a country with a weak economy is in the situation where they are unable to produce and sell goods and get profitable return, there will be considered as debt crisis as well. One of the agencies that keep track the country’s external debt is the International Monetary Fund.