GDP ACCOUNTING - THE IMPORTANCE OF RELIABILITY FACTOR

SHAMSUL GHANI (shams_ghani@hotmail.com)
July 21 - 27, 2008

According to an economic definition, GDP (Gross Domestic Product) is the value of final goods and services produced in the country within a given period. The total output of goods and services is valued at its market price, and the values so obtained are added together to get GDP. The production side of economy converts inputs such as labor and capital into output that is GDP. The inputs capital and labor are called factors of production, and the payments made to labor and capital such as wages, interest, rent etc. are called factor payments with labor being the dominant factor payment. According to another definition, GDP equals the total sum of all factor payments. The factor payments include receipts from our overseas operations and exclude profits earned by foreign companies through their operations in Pakistan. The difference of such receipts and payments is added to GDP to get GNP (Gross National Product). Presently, the difference between GDP and GNP, in case of Pakistan, is around 2 per cent. NDP or Net Domestic Product is measured by deducting depreciation from GDP. Since, capital utilized to produce goods and services has to go through the process of wear and tear, therefore, economists maintain that the cost of depreciation should be recognized as a deductible item for all calculation purposes. Like other economic anomalies, the question of depreciation of human capital -and its accounting- remains unresolved.

GDP accounting is a very complex exercise and calls for an honest and professional approach. Besides the knowledge of the basics of economics, the validity and reliability of data hinges on an immaculate reporting and record keeping system. Double counting is the most common pitfall that may lead to an overstatement of GDP. For example, only new houses constructed during the year are to be counted. The transaction of a house constructed in any of the previous years may be erroneously included in current yearís GDP. However, any real estate commission earned on such transaction must be included in current yearís GDP. The total sale value of a new car fitted with such intermediary goods as tyres etc. has to be adjusted for the value of such goods already taken into account by the manufacturers of intermediary goods. A simple rule calls for making adjustment at each value-addition stage. The payment made to the farmer for a cotton crop is to be taken into account by the ginner and the baler. A spinner must deduct the cost of a cotton bale from the sale proceeds of yarn. Similarly, a weaver must deduct the cost of yarn from the sale proceeds of fabric, so on and so forth. Another anomaly is the methodologyís failure to take into account the improvement in the quality of goods and the degradation of environment and quality of life. The chemical industryís output is counted whereas the damage caused by the careless disposal of industrial waste is not quantified as a deductible item.

GDP is the measure of a countries economic progress and its peopleís well-being. False GDP measurement may lead to unsound economic decisions. In modern economics, things are measured in relation to the countryís GDP for example savings to GDP ratio, tax to GDP ratio, investment to GDP ratio, education and health allocations as percentage of GDP etc. The importance of reliability factor becomes more important when our statistics are put to close scrutiny by the international lending and donor agencies on whose financial assistance depends on the development of our economy.

REAL & NOMINAL GDP

Real GDP measures final goods and services produced in different years at constant prices. In case of Pakistan, the revised base year is 1999-2000 and the value of all outputs is calculated at prices prevailing in the year 1999-2000. Nominal GDP for a particular year is measured in prices of that year that is in current prices. The value of goods and services produced in 2006-07 is measured in prices prevailing in that particular year.

NOMINAL GDP OF PAKISTAN (AT CURRENT FACTOR COST)

MILLION RS

SECTOR

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

Agriculture

968,291

1,059,316

1,164,751

1,314,234

1,382,660

1,608,522

Industrial

989,349

1,083,914

1,416,986

1,659,285

1,939,160

2,203,490

Services

2,188,527

2,390,988

2,668,790

3,149,049

3,807,356

4,414,507

Gross Domestic Product (GDP)

4,146,167

4,534,218

5,250,527

6,122,568

7,129,176

8,226,519

GDP % Growth

 

9.36

15.80

16.61

16.44

15.39

Net Factor Income from abroad

23,665

151,812

124,478

134,461

149,901

160,738

Gross National Product (GNP)

4,169,832

4,686,030

5,375,005

6,257,029

7,279,077

8,387,257

Population in million

143.17

146.75

149.65

152.53

155.37

158.17

Per Capita Income (Rs.)

29,125

31,932

35,917

41,022

46,850

53,027

Per Capita income in $ (@Rs.60)

485

532

599

684

781

884

Per Capita GDP (Rs)

28,960

30,898

35,085

40,140

45,885

52,011

Per Capita GDP in $(@Rs.60/-)

483

515

585

669

765

867

The nominal GDP changes from year to year because of changing volumes and changing prices. Whereas changing volumes tell us about the changes in the production levels, the GDP change resulting from change in prices distorts the measurement. This is the reason why real rather than nominal GDP is used to compare the output levels in different periods.

REAL GDP OF PAKISTAN (AT CONSTANT FACTOR COST OF 1999-2000)

MILLION RS

SECTOR

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

Agriculture

904,433

941,942

964,853

1,027,403

1,043,587

1,095,673

Industrial

888,539

926,183

1,076,808

1,207,268

1,267,413

1,353,554

Services

1,952,146

2,053,979

2,173,947

2,358,559

2,585,736

2,791,494

Gross Domestic Product (GDP)

3,745,118

3,922,104

4,215,608

4,593,230

4,896,736

5,240,721

GDP % Growth

 

4.73

7.48

8.96

6.61

7.02

Net Factor Income from abroad

22,594

127,050

90,721

88,750

84,343

86,110

Gross National Product (GNP)

3,767,712

4,049,154

4,306,329

4,681,980

4,981,079

5,326,831

Population in million

143.17

146.75

149.65

152.53

155.37

158.17

Per Capita Income (Rs.)

26,316

27,592

28,776

30,695

32,059

33,678

Per capita GDP (Rs)

26,159

26,726

28,170

30,114

31,517

33,133

(2006-07 GDP revised to 6.8%)