Page 15 - Azerbaijan State University of Economics

Hashim Al-Ali: Towards a realistic medium term macroeconomic and fiscal framework and
outlook for the Somali national economy (2017- 2019)

local) investment expenditures, which is, itself, affected by total credits, as well as by the level of
economic activities at large. Total investment will then determine the GDP by applying an
exogenously calculated Somali incremental capital-output ratio (ICOR). While GDP feeds back
to determine, in part, the level of private investment. Besides, the aggregate consumption
expenditure is derived as a function of income. Also, GDP and employment relationship has
been introduced, and the employment elasticity of GDP (output) has been worked out.

The macroeconomic model that has been developed for Somali economy and has been used to
derive this paper’s results, by and large, is related to the Keynesian and Harrod-Domar type and
class of models, with some adjustment, reflecting the prevailing economic conditions in Somalia.
Although it is an aggregated macro-fiscal model, it has taken in consideration sectoral
distinctions and related functions.

In brief, the approach based on macroeconomic balances between the demand (expenditure) side
of the economy, and the supply (products) side. Where the demand side is expressed as:

GDP t = C t + G t + I t + E t – M t

And the supply side is presented as:

i
GDP t = Σ V t

Where:
GDP t: is `gross domestic product at year t
C t: is private consumption expenditures at year t
G t: is public (government) consumption expenditures at year t
I t: is total investment at year t
E t: is total exports at year t
M t: is a total import at year t
i
V t : is the value-added of sector i at year t (i=1,2,….,n)

And n is in this case equal 3, where the economy has been disaggregated, in this approach, to
three main sectors, namely; Productive Sector, Infrastructure Sector and Social Services and
other Services Sector.

However, the above macroeconomic accounting model and the two balancing equations system,
have in between a number of equations systems depicting the technical, and the interrelated
production, consumption, investment, government expenditure/revenue, trade, employment,
productivity and total factor productivity [This total factor productivity (TFP) estimated and
calculated as Solow residual in the economy. The Solow residual originated through the works of
Robert M. Solow, an American economist and recipient of the Nobel Memorial Prize in Economic
Sciences (1987). The Solow residual is a value that measures changes in productivity growth in a
Solow growth model, which describes an entire economy's production function. Productivity
growth refers to rising output occurring with constant labor and capital input.] and other related

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