GDP MAZE

SHAMSUL GHANI
(feedback@pgeconomist.com)
July 4 - 10, 20
11

A September 2009 report, by the Commission formed by the French President, on Measurement of Economic Performance and Social Progress mentions: "Indeed, for a long time there have been concerns about the adequacy of current measures of economic performance, in particular those solely based on GDP. Besides, there are even broader concerns about the relevance of these figures as measures of social wellbeing. To focus specifically on the enhancement of inanimate objects of convenience (for example in the GNP or GDP which have been the focus of myriad of economic studies of progress), could be ultimately justified - to the extent it could be - only through what these objects do to the human lives they can directly or indirectly influence. Moreover, it has long been clear that GDP is an inadequate metric to gauge wellbeing over time particularly in its economic, environmental, and social dimensions, some aspects of which are often referred to as sustainability." 

The Commission comprised Professor Joseph E. Stiglitz, Chair, Columbia University; Professor Amartya Sen, Chair Adviser, Harvard University; and Professor Jean-Paul Fitoussi, Coordinator of the Commission, IEP. Twenty one members from world-renowned colleges and universities assisted the Commission. The report focuses on inadequacy of information and often misleading impressions these measures (GDP and GNP) tend to create. Concerns like growing inequality of incomes, environmental degradation and natural resource depletion are seldom explained by these mute figures of economic growth. Since the capitalistic economy, particularly the US capitalistic system, aims at concentration of wealth in fewer hands under the garb of a higher GDP, it should not be surprising if inequality of income is not discussed under these systems as sharply and boldly as it should be. A simple below-the-poverty-line indicator is thought to suffice.

In the developing and struggling economies, poor road infrastructure often leads to traffic jams which are serious health and environmental hazards. Amazingly, this situation results in a higher GDP for the economy as more fuel is consumed. The environmental degradation, physical and mental distress caused to the public and a faster natural resource depletion (or an increased import bill) ensuing from this situation are conveniently lost sight of in favor of a higher GDP reporting. Moreover, the damaging structural imbalances taking place are just routinely reported without giving any serious thought to the shift in balance.

The developed industrial economies can afford to shift their focus from industry and agriculture to the services as they can swiftly revert to any past position.

The developing and struggling economies have to keep their focus on agriculture and industry to achieve food security and technological advancement. If they follow the suit that is to emulate the developed economies, they are bound to soon find themselves in trouble.

Banking, insurance and finance, forming the major part of services sector, produce paper wealth and credit money which may be as vital to the developing economies as the developed ones. But, what balance is to be maintained between the services and real sectors could well be a critical decision for a developing economy. And, this decision must be made on the basis of ground realities prevailing in that particular economy. Failure to address these implications in GDP reporting is yet another flaw of this dubious yardstick.

GDP is calculated by using any of the three approaches, namely, product approach, expenditure approach and income approach. Under product approach, the total sum of output of all producers is taken. Under expenditure approach, total private consumption, total investment, total government spending and total exports are added.

From the total sum, imports are subtracted to reach the figure of GDP. The equation is: GDP = Consumption + Investment + Government Spending + Exports and Imports. Under the income approach, the incomes of all factors of production are added. These components are wages, salaries and supplementary labor income: corporate profits; interest and miscellaneous investment income; farmer's income; income from non-farm unincorporated businesses. These five components add up to national domestic income at factor cost. To convert the national domestic income from factor cost to market prices, indirect taxes are subtracted and subsidies added. Thus, we reach an economy's net domestic product (NDP). Addition of depreciation (capital consumption) to NDP gives us GDP.

PAKISTAN'S LEADING ECONOMIC INDICATORS FY-10

INDICATORS

IMF ESTIMATE

WORLD BANK ESTIMATE

CIA FACTBOOK ESTIMATE

GDP (Purchasing Power Parity; Billion $)

464.7

445.5

464.9

Pakistan's Rank

27

26

27

Total Number of Countries

182

178

193

GDP (Official Exchange Rate;  Billion $)

174.9

166.5

174.9

Pakistan's Rank

47

44

47

Total Number of Countries

181

185

190

Per Capita GDP (Purchasing Power Parity;   $)

2,791

2,609

2,500

Pakistan's Rank

136

121

148

Total Number of Countries

183

168

194

Per Capita GDP (Official Exchange Rate;  $)

1,050

965

900

Pakistan's Rank

145

145

156

Total Number of Countries

183

181

192

Another dimension added to the maze of GDP is purchasing price parity (PPP). GDP of countries now undergoes dual calculation: on the basis of official exchange rate as well as purchasing price parity. The PPP concept originates from the unreliability of countries' exchange rates. Under this concept, a sample basket of goods and services is taken and valued separately on the basis of local currency and the US$. The local currency price of the basket when divided by the $ price of the basket should yield the real exchange rate. Any variation would reveal the undervaluation or overvaluation of the local currency. This exchange rate distortion is corrected and given the name 'PPP adjustment factor' for use in the calculation of GDP of that particular country. To simplify the issue, the basket of goods has been replaced by McDonald's Big Mac under the Big Mac Index PPP exchange rate system. Similar other indexes, such as Starbucks tall latte index, are in vogue but the economists generally put greater faith in Big Mac index. The PPP concept is obviously quite complex and puts a question mark on its reliability. There might well be a host of economic differences between the two compared economies - the stage of development, technological advancement, natural resource position, transport, and other infrastructure, etc. An International Comparison Program (ICP) has undertaken to tackle this issue. One expects that work done under such programs will enhance the reliability of PPP system as a common yardstick for measuring and comparing world countries' GDP.