How do Macroeconomic Conditions Affect GDP?
(BRICS Case Study)
HERU WAHYUDI
Economic Development, Faculty of Economics and Business,
University of Lampung,
Jln. H. Komarudin, Rajabasa Raya, Rajabasa, Bandar Lampung,
INDONESIA
Abstract: - One of the international institutions in the spotlight is BRICS. Because the countries incorporated in
it (Brazil, Russia, India, China, and South Africa) have a fairly high income. Thus, the purpose of this study is
to see what factors contribute to economic growth in BRICS countries. The method in this study is Fully
Modified Ordinary Least Square (FMOLS). By using a variable of investment, labor force, and electrical
energy consumption. Based on the results of the study, there is a positive influence on BRICS revenue.
Key-Words: - income, Electrical Energy, FMOLS, GDP, Investment, Labor Force.
Received: March 13, 2024. Revised: August 17, 2024. Accepted: September 9, 2024. Published: October 7, 2024.
1 Introduction
With the performance of BRICS countries in the
economic field, they are certainly indeed optimistic
about achieving this goal, [1]. BRICS' economic
growth is highly anticipated by several other
countries, which was not in 2021 when the Covid-
19 pandemic still shook the world. BRICS
contributed 25.61014 percent to the world's Gross
Domestic Product (GDP). According to [2], the
NDB has approved 70 infrastructure and sustainable
development projects worth US$ 25.07 billion over
the past five years, including loans provided under
the NDB Emergency Assistance Facility among
member states.
Gross Domestic Product (GDP) of a country is a
measure of the success of a country, both in terms of
human resources and natural resources, because the
country's GDP comes from various supporting
sectors, such as agriculture, industry, investment,
and others GDP is generally calculated based on two
approaches, namely the sectoral or business field
approach and the usage approach. In addition, GDP
is also calculated based on current prices and
constant prices. The value of gross domestic product
divided by the number of country population in
certain period of time, [3].
BRICS has evolved into a strong platform for
dialogue and cooperation, [4]. The high GDP
obtained by a country is one of the indicators of a
country's welfare, which is indeed inseparable from
the factors that influence it. This requires an in-
depth analysis to determine what affects a country's
GDP level to produce appropriate and effective
regulation. One factor that supports a country's
economy is energy, especially electrical energy.
Electricity is necessary for economic, social, and
cultural progress in all developed, developing, and
less developed countries, [5]. In addition, electricity
is one of the basic needs that are very important for
human life, where almost all human activities are
related to electrical energy, [6].
Energy can be divided into two, namely
renewable energy and non-renewable energy.
Although sustainable energy use is still minimal in
BRIS countries, BRICS countries strive for
sustainable energy use. This shows that BRICS
supports sustainable development. One aspect of
energy planning is the relationship between the
energy sector and economic growth. Energy
planning scenario is an assumption or direction
of policy in energy planning that will be carried
out, [7].
India is the country with the highest average
consumption of electrical energy compared to other
BRICS countries. However, the GDP value obtained
by India is still below China, with a relatively lower
average use of electrical energy consumption than
India. This shows that other factors affect a
country's GDP. GDP is also heavily influenced by
human resources. China and India are the most
populous countries in the world, making it an
opportunity and a challenge for the economy.
Based on research conducted by [8], found that
the labor force has a positive effect on GDP, while
based on research, [9], found that the labor force
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hurts GDP. Research from, [10], revealed that
based on other than labor and capital stocks,
electrical energy is a much-needed input to produce
goods and services. Thus, this study includes
capital, an investment, to see its effect on GDP.
Some economists view that the formation of
investment is an essential factor responsible for the
growth and development of a country's economy.
According to [11], some economists believe
investment formation is essential to a country's
economic growth and development. Increasing
capital stocks will increase productivity, production
capacity, and quality, encouraging economic
growth, [12]. This is in line with research conducted
by [13], [14] which found that investment has a
significant positive effect on GDP. Meanwhile, [15],
found that investment does not affect GDP. Previous
research differences underlie this research to
produce the latest studies. The novelty of this study
is distinguished by the object of study, the year of
analysis, and the combination of variables used to
see its effect on GDP. The purpose of this research
is to identify the factors that influence GDP The
variables used are electricity consumption,
workforce, and investment in BRICS countries The
benefit of this research is expected to be one of the
policy recommendations for BRICS countries in
particular and can be adapted by other countries to
achieve economic prosperity.
Gross Domestic Product (GDP) is the total
value of goods and services produced in a country
by both domestic and foreign citizens in a year [16].
According to [17], economic growth is measured by
GDP. One of the factors that significantly affect
GDP is energy. Energy as a resource in the economy
has an important role, especially electrical energy,
which is a primary need for households and
companies. Based on Adam Smith's Classical theory
and the neo-classical economic views of Robert
Solow and Trevor Swan, four factors affect the
economic growth of the population, the number of
stocks of capital goods, the area of land and natural
resources, and the level of technology used, [18], in
this study using electrical energy consumption to
represent natural resource variables.
The amount of electricity consumption is directly
linked to a country's economic growth due to the
expansion of the global economy and the increase in
per capita income demanding electricity-based
equipment, [19]. Based on research conducted by,
[19], in their research entitled “Electricity
Consumption and Economic Growth: A Revisit
Study of Their Causality in Malaysia” found that
electricity consumption has a positive effect on
Malaysia's economic growth. According to [20],
Solow's growth model shows that economic outputs
are influenced by capital, labor force, and
technology changes.
Research conducted by [21], found interesting
results, namely that the population has a negative
relationship to economic growth, while the labor
force positively influences economic growth. The
research conducted by Utama also distinguishes
male labor and female labor, where male labor has a
negative and significant impact on economic
growth. The female workforce significantly
influences economic growth in the five countries of
the Organization of Islamic Cooperation (Indonesia,
Pakistan, Egypt, Nigeria, and Bangladesh).
Research from, [22], found that the labor force
significantly affects economic growth.
Research from, [23], in Harrod-Domar's theory,
capital formation is seen as an expenditure that will
increase the ability of an economy to produce
goods, and as an expenditure that will increase the
effective demand of the entire community. So it can
be concluded that economic growth can increase
with investment. This study used Gross Fixed
Capital Formation (GFCF) data as an indicator for
investment. Gross fixed capital formation is an
expenditure made by the government for capital
goods investment activities, not for consumption
activities, which includes developing and improving
infrastructure in a country, [24].
The positive relationship between gross fixed
capital formation and GDP was found to have a
significant positive correlation in the research, [25].
According to [26], investment will increase
production capacity by increasing the company's
capital goods so that total production will impact the
amount of income and continuously affect the
national income of a country. The study results align
with the research, [27]. Increasing the GFCF will
create an expanded scale that can create jobs to
increase public consumption and improve a
country's economy.
2 Methodology and Variables
The type of data in this study uses secondary data,
namely data obtained from the World Bank and
Energy Information Administration (EIA)
institutions. This study used a panel data set from 5
regions covering Brazil, Russia, India, China, and
South Africa (BRICS). The period used in this study
was between 1992-2021. The determination of the
research timeframe is based on the availability of
the latest data, which includes economic growth,
electrical energy consumption, labor force, and
investment in BRICS countries. In those years, there
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was also economic development in the BRICS
country. At the same time, the selection of BRICS
countries is because the strength of these countries
is tremendous, even with a small number. One of
the BRICS members is China, with the most
populous population in the world, so this study also
included labor force variables to see how it affects
economic growth in the long term.
To determine the long-term relationship between
electrical energy consumption, labor force, and
investment to economic growth in BRICS countries
from 1992 to 2021, the method used is Fully
Modified Ordinary Least Square (FMOLS) with
data processing tool EViews 10. This study used a
specific model, as seen in Equation 1.
LNGDP = β0 + β1LNENCit + β2LNLFit +
β3LNGFCFCit + εit (1)
Where LNGDP is the logarithm of natural Gross
Domestic Product (USD), LNENC is the logarithm
of natural electrical net consumption (Billion kWh),
LNLF is the natural logarithm of the labor force
(Soul), LNGFCF is the natural logarithm of Gross
Fixed Capital Formation (USD), β0 is Constant,
β1,2, 3 is Coefficient, ε is Residual, i am Region (5
countries of BRICS). T is time (1992-2021).
The first method is after a literature review and
hypothesis development. Furthermore, a descriptive
statistical analysis of research variables was carried
out. Before the data is tested using the FMOLS
method, stationarity, and cointegration tests are
carried out. The first is related to stationary testing.
According to [28], this method is carried out so that
the data avoids spurious regression between
dependent and independent variables. Spurious
regression is a condition where the coefficient of
determination is relatively high, but the relationship
between the dependent variable and its independent
variable has no meaning. This study used the
Augmented Dickey-Fuller (ADF) and Phillips
Perron (PP)-Fisher test methods. The provision is
that when the probability value is above the
significance level (0.05), the data is declared non-
stationary, and vice versa. The data is declared
stationary when the probability value is below the
significance level. A first different stationary test is
carried out when the data is not stationary at the
level. Data that is already stationary at first can be
continued testing with cointegration tests.
According to [28], a cointegration test was
carried out to determine whether the variables
studied had a long-term equilibrium relationship.
This study uses the Kao Residual Cointegration Test
method. Kao in Baltagi (2013), [29], uses a residual-
based standard approach of DF and ADF tests to test
cointegration in panel data by adopting a step
procedure performed by Eagle-Granger. Data is
declared cointegrated when the probability value is
smaller than the significance level (0.05). After the
data is declared cointegrated, the FMOLS test can
be carried out.
3 Result and Discussion
3.1 Result
The first condition for FMOLS to be met is that all
research variables must be stationary. Research
conducted by [30], suggests that the latest literature
shows that panel-based unit root tests have higher
strength than unit root tests based on individual time
series. In Table 1, it can be seen that only the labor
force variables (LNLF) are stationary at the level
and first different. In contrast, the gross domestic
product (GDP), electricity consumption (LNENC),
and investment (LNGFCF) variables are not
stationary at this level. This can be seen from the
labor force probability value of less than the
significance level (0.05), while other variables have
a more excellent probability value than the
significance level. Because the data is not stationary
at the level, it is necessary to carry out further
testing on the first difference. After the first
different test was carried out, it was discovered that
all variables used in this study were stationary, so
the first condition for the FMOL model was met.
Thus, the next test can be carried out, namely the
cointegration test (Table 1).
Table 1. Unit Root Panel Test
Variable
Root Unit
Method
Level
LNGDP
ADF-Fisher
0.8731
PP-Fisher
0.9347
LNENC
ADF-Fisher
0.9544
PP-Fisher
0.7849
LNLF
ADF-Fisher
0.0013*
PP-Fisher
0.0000*
LNGFCF
ADF-Fisher
0.8601
PP-Fisher
0.8884
Note: *significant at 5%
After the stationary test is carried out and
confirmed that all static data is first different, the
cointegration test is carried out. The cointegration
test is carried out by testing the stationariness of the
residual so that an adjustment occurs towards a
long-term balance between variables. In other
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words, two variables are said to be cointegrated if
the two random variables move together with the
same pattern even though the two variables are each
random walks. The cointegration test in this study
used the Kao Residual Cointegration Test method.
The cointegration test output is presented in Table 2.
Table 2 shows that the ADF probability is 0.0000,
where the figure is smaller than the significance
level. So it can be concluded that the variables used
in this study are cointegrated in the long term. Both
conditions for the FMOLS test have been met. The
next step is to estimate FMOSL.
Table 2. Kao Residual Cointegration Test Results
ADF
t-Statistic
Prob.
-5.626874
0.0000
Residual variance
0.002600
HAC variance
0.002337
Both conditions for conducting the FMOLS test
have been met and are related to the FMOLS
estimation output shown in Table 3. The use of the
FMOLS method to determine the long-term effect
of electricity consumption variables, labor force,
and investment on gross domestic products in
BRICS countries in 1992-2021. Based on Table 3, it
can be known the probability value that shows the
coefficient and statistical value of each variable
used in this study.
The variable t-static values of electricity
consumption (LNENC), the labor force (LNLF), and
investment (LNGFCF) were 3.615958 and
1.9892296, respectively. and 48.94104. As for the t-
table value with the degree of freedom (n-k), where
n is the number of observations and k is the number
of free and bound variables used, the value of the
degree of freedom=146 is obtained from (150-4).
Based on this, it can be seen that each t-statistical
value of the free variable is greater than the t-table
value, so it is concluded that the variables of
electrical energy consumption, labor force, and
investment have a significant effect on GDP in the
BRICS country in 1992-2021. In Table 3, it is also
known that the regression coefficient (R2) value in
this study is 0.995686, meaning that the
consumption of electrical energy, labor force, and
investment can affect the GDP variable of 99.5686
percent. In comparison, the remaining 0.4314
percent is explained by other variables not included
in the model.
Table 3. FMOLS Test Results
Variable
Coefficient
Std. Error
t-Statistic
Prob.
LNENC
0.010430
0.002884
3.615958
0.0004
LNLF
0.252419
0.126889
1.989296
0.0487
LNGFCF
0.856046
0.017491
48.94104
0.0000
R-squared
0.995686
Mean dependent
var
27.6020
2
Adjusted R-
squared
0.995465
S.D. dependent var
1.12975
9
S.E. of regression
0.076079
Sum squared resid
0.79296
3
Long-run variance
0.012752
3.2 Discussion
The value of the coefficient of electrical energy
consumption is 0.010430, meaning that if the
consumption of electrical energy increases by 1
percent, then the GDP in BRICS countries will
increase by 0.010430 percent, cateris paribus. The
results of this study are by Classical Economic
Theory, where one of the factors of economic
growth is natural resources. Electrical energy is
included in natural resources vital to a country’s
economy. This research is also by the Neo-Classical
Theory, which states that an increase in energy
consumption reflects an increase in the economy,
[31]. The increase in electricity consumption
identifies the high purchasing power of electricity
by the public (both for household and corporate
consumption), which shows that people's incomes
are also high to increase GDP, thus to the positive
correlation between energy consumption and GDP.
Different results are shown by research conducted
by [32], which found that increased consumption of
electrical energy will have a negative effect on
GDP.
This research is in line with research conducted
by [33], in their research entitled "Influence of
Electricity Consumption of Industrial and Business,
Electricity Price, Inflation and Interest Rate on GDP
and Investments in Indonesia" The findings suggest
that the path coefficient on electricity consumption
to GDP is 0.951. CR = 37.06 means that electrical
consumption has a significant favorable influence
on GDP. The results of this study also, in line with
research conducted by [34], in their research entitled
"The Relationship between Electricity Consumption
and Economic Growth in China," found that there is
a one-way positive causality between electricity
consumption and economic growth, meaning that
electrical energy consumption has a positive effect
on economic growth.
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The findings in this study are by the phenomenon
identified in the descriptive statistical analysis,
China with large energy consumption accompanied
by high GDP obtained in 2021. Nonetheless, BRICS
is a developing country in terms of resource
production and management and requires a
consistent supply of energy resources; BRICS
countries must monitor energy consumption,
focusing on the energy supply-demand gap and its
components and facilities provided to local and
foreign investors, [35]. South Africa, with the
lowest average energy consumption compared to
other countries, is one of the most intensive
economies globally. Based on the report of the
(India Council for Research on International
Economic Relations (ICRIER) (2021), [36],
mentions that South Africa has one of the most
energy-intensive economies globally and accounts
for about 40% of all electricity on the African
continent. In addition, the ICRIER report (2021)
states that access to electricity in Brazil has reached
almost the entire population with 99.8% housing
coverage, 97% of good quality services, and by the
end of 2020, as many as 86.7 million electricity
meters installed covering 86% of households. The
use of large electrical energy consumption can
increase economic growth.
This condition still needs to pay attention to the
limited resources in meeting the needed electrical
energy consumption. Using electricity that does not
apply sustainable principles can reduce the country's
margins to a low level. In the long run, it is feared
that it will harm the environment and lead to
expensive repair costs. BRICS countries have an
excellent opportunity to realize a sustainable
economy. Solar and wind-based power generation
has been India's cheapest source of bulk power
generation since 2018, driven by successful auctions
and falling equipment costs worldwide, [37]. When
viewed from the opportunities in India and China,
wind resources are the most targeted potential to
develop sustainable energy in these countries.
India is the country with the highest consumption
of renewable energy compared to other BRICS
countries. Moreover, it can be known that the most
effective use of renewable energy comes from
hydroelectric. Thus governments in India can
optimize hydroelectric use to meet energy
consumption needs. The government needs to work
with the private sector and the public to use
sustainable energy for the long-term sustainability
and prosperity of the country. Other countries such
as Brazil, Russia, China, and South Africa can
optimize the use of renewable energy The latest
aggregate data on Brazil's electricity and energy
sources was published in 2021, referring to data
from 2020 Among the sources of electricity in
Brazil, hydropower accounted for 652 percent,
followed by biomass (91 percent), wind energy (88
percent), natural gas (83 percent), and other energy
sources Russia has the potential for hydroelectric,
wind, water, geothermal, biomass, and solar energy
While China has the potential for safe and structured
solar, wind, water, and nuclear energy South Africa
has the potential for renewable energy development
in wind and solar In an effort to increase the
development of renewable energy following the
potential of each country, there needs to be the
preparation of an implementable planning document
as well as a comprehensive and transparent
implementation plan.
The value of the labor force coefficient is
0.252419, meaning that if the labor force increases
by 1 percent, then GDP in BRICS countries will
increase by 0.252419 percent, cateris paribus. This
study's results support Robert Solow and Trevor
Swan's theory that the labor force positively
influences economic growth. The study’s results do
not align with the research conducted by [38], in his
research entitled "Contemporary Indonesian GDP:
Context of Analysis at Unemployment, Labor Force
and Poor People.” The negative influence of the
labor force on GDP is caused by the lack of skills of
the labor force, so the labor force increases but is
not accompanied by increased output which results
in a decrease in the amount of GDP.
Research conducted by [21] and [39], found that
the labor force positively and significantly affects
GDP. According to [40], the country's GDP is
calculated based on the total income each resident
earns in economic activity and the total costs
incurred to obtain goods and services. So the more
productive a country is, supported by the labor
force, the more it will increase its GDP. Thus, the
labor force can increase GDP in the BRICS
countries. The high labor force in BRICS countries
that have a positive correlation can also be used as a
reference for other developing countries to adopt
appropriate policies in each country. The findings in
this study follow the phenomenon already identified
in the descriptive statistical analysis; China, with the
most significant labor force, also corresponds to the
high GDP obtained. The relatively lower labor force
compared to other BRICS countries is also
accompanied by a lower GDP obtained by South
Africa compared to other countries. The number of
inhabitants certainly influences the high labor force.
The country with the largest population is China,
followed by India. This condition shows that BRICS
has a vast population. The high number of people in
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BRICS countries, especially China and India, needs
to be considered to improve the quality of human
resources. The government can improve soft and
hard skills built since school in collaboration with
the private sector. Improving these skills certainly
pays attention to the needs of the abilities needed in
the future. If the increase in population is not
accompanied by an increase in the quality of
resources, it can cause demographic problems and is
not by the sustainable development goals.
The value of the investment coefficient is
0.856046, meaning that if investment increases by 1
percent, then GDP in BRICS countries will increase
by 0.856046 percent, cateris paribus. The results of
this study support Harrod-Domar's theory, which
states that capital can increase people's effective
demand and as an expenditure that will increase the
ability of the economy to produce goods and
services. From this statement, it can be seen that
investment has a multiplier effect. According to
[41], investment can generate income and increase
economic production capacity by adding capital
stocks. Investment can create jobs to reduce
unemployment and poverty, improving welfare.
Research from [42], is similar to the findings of
this study. Investment is essential in economic
development and supports improving the production
process, so investment and GDP have a positive
influence. The results of this study are supported by
findings from [43]. However, there are differences
in the results of research conducted by, [44], which
found that investment negatively influences GDP in
long-term conditions.
The most significant investment is in China at
29.4577 percent. The high investment in China can
improve the economy, and the high GDP of China
accompanies this. What needs to be considered
when a country has a significant investment value is
that the budget for allocating funds should be
intended for productive sectors that can improve the
economy. Not only physical investment but also
human capital investment, this is also considering
that China is one of the countries with the most
populous population in the world.
4 Conclusion
Based on the results of FMOLS, it is known that in
the long term, the consumption of electrical energy,
labor force, and investment significantly positively
affects GDP in BRICS countries. Electrical energy
consumption in BRICS countries is predominantly
supported by hydroelectric. If hydroelectric
optimization continues to be pursued, the significant
need for electrical energy in BRICS countries can be
met without harming the environment.
Environmental damage due to economic
activities will lead to more expensive repair costs in
the future. In other words, optimizing the use of
sustainable energy is essential. The phenomenon of
BRICS countries can be used as an example for
developing countries that need electrical energy to
utilize sustainable energy.
The use of sustainable energy can support
sustainable development. This is accompanied by
efforts to reduce the number of people in countries
with high reflections (such as China and India).
Improving the quality of human resources through
improving the quality of education is very
important. It can also delay marriage because a
person is educated and gets married at a mature age.
If this is done, the existing workforce can have the
necessary work skills and create a healthy
generation in the future. This can be accompanied
by convenience for investors investing in BRICS
countries. In addition, BRICS countries should
strive for more prosperity in South Africa. Based on
the results, value, GDP, investment, and labor force
in South Africa occupy the bottom position
compared to other BRICS countries. One of South
Africa’s potentials is gold as a significant mine. The
policies implemented in South Africa should
provide leeway for investors to invest in the
country. Thus, it can create jobs and ultimately
improve the South African economy.
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DOI: 10.37394/232015.2024.20.44
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E-ISSN: 2224-3496
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Contribution of Individual Authors to the
Creation of a Scientific Article (Ghostwriting
Policy)
The author contributed in the present research, at all
stages from the formulation of the problem to the
final findings and solution.
Sources of Funding for Research Presented in a
Scientific Article or Scientific Article Itself
The research in this manuscript is supported by
Informatics and Business Institute Darmajaya.
Conflict of Interest
The author has no conflicts of interest to declare.
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WSEAS TRANSACTIONS on ENVIRONMENT and DEVELOPMENT
DOI: 10.37394/232015.2024.20.44
Heru Wahyudi
E-ISSN: 2224-3496
472
Volume 20, 2024