Gross domestic product is both one of the most useful and
most useless of economic statistics. It is undoubtedly one of the most
versatile, capable of simultaneously measuring the value of economic output,
income and expenditure. But this versatility can also be a weakness, rendering
it open to abuse by the unscrupulous.
GDP is used as a benchmark to gauge economic progress and is closely watched by politicians, policy makers and economists. If it is rising rapidly, so the thinking goes, so too must incomes and output which implies a rise in wellbeing. Well that, at least, is the theory. In essence, GDP applies monetary value to economic activities. It excludes activities for which people are unpaid (e.g. voluntary work) or domestic activities for which no monetary transactions are recorded (which is why it has tended to underestimate the contribution of work done by women, especially in the home). GDP was originally derived from a wartime need to measure the output of physical things, but as the service sector accounts for an increasingly greater proportion of output, so the shortcomings in the original concept have become even more pronounced. This is a problem which statisticians have struggled with for many years, but it has become increasingly challenging of late.
GDP is used as a benchmark to gauge economic progress and is closely watched by politicians, policy makers and economists. If it is rising rapidly, so the thinking goes, so too must incomes and output which implies a rise in wellbeing. Well that, at least, is the theory. In essence, GDP applies monetary value to economic activities. It excludes activities for which people are unpaid (e.g. voluntary work) or domestic activities for which no monetary transactions are recorded (which is why it has tended to underestimate the contribution of work done by women, especially in the home). GDP was originally derived from a wartime need to measure the output of physical things, but as the service sector accounts for an increasingly greater proportion of output, so the shortcomings in the original concept have become even more pronounced. This is a problem which statisticians have struggled with for many years, but it has become increasingly challenging of late.
The release last week of Irish GDP data provided a case in point. The previous data release in March, indicated that the economy grew at a rate of 7.8% in real terms in 2015. But updated figures now suggest that Ireland grew at a rate of 26.3% last year (see chart). To put that into context, it would take an economy growing at a "normal" rate of 2% per annum more than 11 years to record a gain of that order of magnitude. The Central Statistics Office noted that this was due to the availability of “more complete and up to date data than … available … in March 2016.”
Measuring Irish GDP
(EUR, million)
Source:
CSO
To the extent that GDP measures the value (or volume) of
activity within a country’s borders we have to subtract the value of activity
attributable to foreign companies based in Ireland which gives us a measure of
gross national product (GNP). Real Irish GNP grew less rapidly than real GDP
last year but it still recorded a sizeable gain of 18.7%. What this indicates
is that companies have relocated to Ireland to benefit from its low rate of
corporate tax, with the result that all of their assets are transferred to
Ireland’s capital stock and the returns to those assets (a flow variable) are
included in GDP/GNP. In addition to the relocation of corporate assets, the
figures also include a range of one-off factors such as aircraft purchases and
corporate restructuring activities. For confidentiality reasons, the
statistical authorities are reluctant to give full details which has led to
analysts having to fill in a large number of gaps to guess which companies are
responsible for these moves.
This illustrates a problem which bedevils the construction of national accounts data: Shifting definitions and retrospective revisions mean that the data can be extremely volatile. This in turn is a result of the fact that estimates of what we think of as the "true" data are often based on incomplete information.This is true for all countries. After all economies such as Italy, Greece and Nigeria have posted huge increases in output in recent years as a result of new information coming to light (sometimes as a result of the arbitrary inclusion of estimates of shadow activity). But the rigorous application of global rules governing the construction of national accounts, which tend to have relatively small impacts on larger economies, can have unwarranted (and unintended) consequences for smaller economies.
Clearly, we have come a long way from the original purposes of measuring widgets. Moreover, recent Irish changes have major consequences for the wider economy. At a stroke, Irish residents are significantly better off with GDP per head of population now almost €9,000 higher than we thought last week. But the reality is that they have no more money in their wallets (or bank accounts). Moreover to the extent that contributions to the EU budget are based on national incomes, Irish taxpayers are now on the hook for additional payments to the EU. Unless the additional output can be taxed to fund this payment – which it almost certainly will not – this implies that Irish taxpayers will be called upon to find the extra funds. It may only amount to an extra €60 per head per annum but that is roughly 11 pints of Guinness which each Irish person will have to forego. And all because the statisticians have determined that the economy is bigger than anyone thought.
This illustrates a problem which bedevils the construction of national accounts data: Shifting definitions and retrospective revisions mean that the data can be extremely volatile. This in turn is a result of the fact that estimates of what we think of as the "true" data are often based on incomplete information.This is true for all countries. After all economies such as Italy, Greece and Nigeria have posted huge increases in output in recent years as a result of new information coming to light (sometimes as a result of the arbitrary inclusion of estimates of shadow activity). But the rigorous application of global rules governing the construction of national accounts, which tend to have relatively small impacts on larger economies, can have unwarranted (and unintended) consequences for smaller economies.
Clearly, we have come a long way from the original purposes of measuring widgets. Moreover, recent Irish changes have major consequences for the wider economy. At a stroke, Irish residents are significantly better off with GDP per head of population now almost €9,000 higher than we thought last week. But the reality is that they have no more money in their wallets (or bank accounts). Moreover to the extent that contributions to the EU budget are based on national incomes, Irish taxpayers are now on the hook for additional payments to the EU. Unless the additional output can be taxed to fund this payment – which it almost certainly will not – this implies that Irish taxpayers will be called upon to find the extra funds. It may only amount to an extra €60 per head per annum but that is roughly 11 pints of Guinness which each Irish person will have to forego. And all because the statisticians have determined that the economy is bigger than anyone thought.
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