A simple way to think about GDP

The most important question to come out of the video we shared the other day was of course this one: why did South Korea grow so much faster than India?

 

But in order to answer that question, we first need to ask another. And this question is a very important one from a theoretical perspective. When we say South Korea grew faster, what exactly are we measuring? In other words, the growth of what, exactly?

 

There are many, many different sources for understanding more about GDP – its definitions, its measurement, and the data associated with GDP in an Indian context. We have a post up about this ourselves. But in this post, we aren’t going to cover any of these topics – we’re going to give you a simple way to think about what GDP is, exactly.

 

Here’s a question: do you remember how many marks you scored in your final math exam when you were in the fourth standard? Of course you don’t. But if I were to ask you your favorite memory of the time that you spent in the fourth standard, an answer is far more likely. And GDP, for a nation, is kind of like marks for a student. It is a very good way to objectively measure progress, but it is equally important to remember that just as marks aren’t all that a student’s life is about, GDP isn’t all that a country’s progress is about.

 

That being said however, measuring a country’s performance by measuring its economic output is the best we can do right now. This (measuring a country’s GDP) is important because it allows us to do three things:

 

  1. It allows us to settle, insofar as these questions can be settled, the issue of how much income we generated in one year (or one quarter, or one month)
  2. It allows us to find out how much more we produced compared to our own output in the previous year (or the previous quarter)
  3. It allows us to compare ourselves with what other nations have been up to in the same time period.

That is to say, it allows to be objective about our performance, and allows us to compare across time, and across space. Without us, and South Korea, and all other nations on this planet using more or less the same methodology to measure economic output, comparisons would be impossible.

 

So if you’ve always wondered what the big deal about GDP is, you are right, in a way. GDP is to a country as marks are to a student. Very important, and the most objective way to measure progress, but certainly not the be all and end all.

 

So all right, when we talk about growth, we’re talking about GDP growth. However, if you go back and take a look at the video, you’ll find that the horizontal axis is talking about GDP growth adjusted for inflation and purchasing power parity (PPP). We’ll be talking more about these concepts in our follow-up blog posts.

Advertisements

A Tale of Three Movies

We took a look at statistics in the previous posts, and learnt how India has gotten richer over time. Rather slowly, since independence until the mid-1980’s, and then increasingly rapidly since then. Which is all well and good, but every Indian knows that statistics are like skirts.

So let’s try and take a non-data oriented look at India since Independence, shall we? And what better way of taking a look at India than by taking a look at Bollywood?

In the year 1954, Bimal Roy directed a movie called “Naukari”. Starring Kishore Kumar (in a very un-Kishore Kumarian avatar), the movie is about the difficulty that the youth of India face in terms of finding employment in India’s cities. To call it a tear-jerker is an understatement – one calamity after another befalls our protagonist.

My point is not the plot, though, but the theme. If you accept the argument that mainstream Bollywood movies are all about giving the janta what they want, then this movie was a reflection of stuff that people identified with back then. A movie about an idealistic youth who leaves his village to go work in the city is what the 1950’s were about.

Fast forward to 1975, and to one of my all-time favorite movies: Deewar. I love it for the acting, the dialogues and the plot, as does everybody else, but my inner economist is also a big fan of the movie. You see, Kishore Kumar in Naukari was about finding a job. Amitabh, by 1975, had given up on finding one. One way of viewing the movie is to say that fate conspired against him. The other way would be to say that the system failed him – and I’d argue that this is something that quite a few people back then could at least partly empathize with.

Deewar succeeded for multiple reasons, but at least one of those reasons was the fact that it struck a chord with the youth of that time: anger about jobs being hard to come by is a palpable sentiment in most movies of that time.

And then move on to the movie that best represents the zeitgeist of the India that I grew up in: Dil Chahta Hai. DCH wasn’t about aspiring to get a job, it wasn’t about being angry at the prospect of not landing one – it was about not caring a damn about the whole thing. This point is repeatedly driven home in the movie: Aamir Khan’s dialogue just before “Koi Kahe”, or the scene with his parents in which he’s packed off to Sydney come immediately to mind.

And we lapped it up! Couldn’t get enough of it. And it is quite true: the middle-class urban youth of our time wasn’t big on worrying about landing a job. It wanted to drive to Goa in a Merc.

Each movie was appropriate to its time. Audiences in the 1950’s didn’t want to see Dil Chahta Hai, and theatre going audiences in the 2000’s didn’t want to see movies about jobs.

Well, ok, maybe they did.

On the Importance of Trade

So if getting rich is the point of economics, it begs a very important question. How?

That is, how does one go about getting rich? And economists have a one word answer to that question: trade. It is trade that makes us rich. It is trade that differentiates us from all other living things on this planet. It is trade, and this is no hyperbole, that defines who we are.

Because it is through trade that we are able to get from others (peaceably and through voluntary exchange) that which we cannot produce, while giving to still others that which we can. In simpler words: I’ll do what I can, and you’ll do what you can, and then lets trade.

This is by no means an original idea. Quite the opposite, in fact. And yet it remains an understated, undefended idea that doesn’t receive its fair share in the spotlight. But it needs to be said, explained and emphasized: trade is good. When we trade, we’re richer. As was explained last time around: we’re both richer.

And so an economist will (or should, at any rate) say that self-dependence is not a good thing. Voluntary trade with foreigners is good. Voluntary trade within a national boundary or outside of it – it doesn’t matter, it makes the people involved in that trade better off. And so the more that people trade, the richer they, and therefore the country they belong to, get.

The average Indian earned about 900 dollars in a year in 1947. Getting independence mattered for self-evident reasons, but it mattered in an economic sense as well, because trade was rather more voluntary after that. And that worked, because by the mid 1980’s, the average Indian was earning about 1350 dollars per year. That is, the average Indian was 50% richer by then.

But when trade was not just voluntary but also free of the encumbrances that our own government used to impose on us, that is, after the economic reforms of 1991 – why, then the average Indian was able to earn about 6000 dollars per year. From the mid-1980’s until today, the average Indian was 450% richer. That’s a lot of %!

Think about what we spoke about in the previous post: we’d want India to have rapid, stable, inclusive, sustainable growth within the framework of a political democracy. If that’s the dish you want to cook, then you need that all important ingredient: voluntary trade.

What voluntary trade does is that guarantees growth, and rapid growth, at that. That much is undeniably true. China after 1978, South Korea for the last four decades of the twentieth century, Singapore after 1965, and even India after 1991 – they’re all conclusive proof that trading more leads to more, and more rapid, growth.

Trade, unfortunately, does not necessarily guarantee the other three adjectives: it does not guarantee stable, inclusive or sustainable growth. That’s why the economics profession exists, and that’s why I get to write (and you get to read!) many, many more blog posts.

But hey – without trade, we got no story to tell. Remember that.

 

Why is economics important?

Or put another way, what is economics all about, and why should we be studying it?

I’ve been teaching economics for a number of years now, and the stock answer I get when I pose this question is generally a paraphrased version of the definition bequeathed us by Lionel Robbins. And that’s probably because some blessed cog in the Indian education system decided that that was the definition to go with in a textbook.

But no, scarce means and unlimited wants (or whichever remixed version of that song you have listened to) is not  the definition of economics.

Or shouldn’t be, at any rate.

Economics is about getting rich.

Most people recoil instinctively when they hear this, because we have a bit of a cultural stigma associated with getting rich. Rich in India is the big bad industrialist from Bollywood, or the cunning conniving politician, or the sly, evil hoarder.

Not always nowadays, thank god. The word rich also summons up images of start-ups these days, which is wonderful – but still, rich is not necessarily a “good” adjective.

And the reason  it isn’t a “good” adjective is because we view getting rich as a zero sum game. For every big bad industrialist, there is the poor struggling worker. For every cunning, conniving politician, there is the struggling-to-make-ends-meet-common-man. For every hoarder, there is the poor farmer. Which is what the phrase “zero sum game” means: for me to get rich, somebody somewhere must get (and stay) poor.

There existed a long time ago in England a man who would have shaken his head rather vigorously at the last sentence in the paragraph above. Trade, that man would have said, is anything but zero sum. I trade with you because I get rich. The magic is this: you trade with me because you get rich as well. Trade, slightly puzzlingly, leaves both of us better off.

Think about the last time you ordered a meal online. Maybe it was because you were in office and couldn’t cook a meal yourself right then, or maybe it was because you were at home but too tired to cook. In either case, it was too expensive in terms of time and/or money to cook a meal yourself. And so ordering a meal left you better off.

But did the restaurant suffer because you ordered that meal? Nope! It  too was better off because you ordered that meal. As, by the way, was Zomato or Swiggy that arranged for you to get that meal from that restaurant. And the guy from Delhivery who actually delivered the food. Nobody lost out on this trade. And nobody loses out on millions of these kinds of trades that take place every minute on every corner of the globe.

In fact, the more there are of these trades, the richer we are. And since both you and I are getting rich, both of us think its a good thing. And so allow me to amend that definition I put above by adding just one word to it:

Economics is about us getting rich.

And that’s a damn good thing.

 

Understanding the Importance of GDP Growth

What is GDP all about? Why is it so very important, and why do economists spend so much time in tracking it? As we discussed in an earlier post, the GDP growth rate is one way of understanding how much more we produced in a given period compared to the last one.

So more is always good, right?

Well… not quite.

It’s a question I struggle to answer in the context of GDP growth, because yes, growth is good, but with qualifiers. It’s a little bit like saying that speed is good where a car is concerned, but too much of it can be quite disastrous.

And in a book that I have started reading recently, I came across a way of thinking about GDP growth in India that I quite liked:

In this book, I define the objective of India’s economic development as rapid, inclusive, stable and sustainable growth of national income, within a political framework of liberal democracy

(emphasis in original)

The book in question is “India’s Long Road” by Vijay Joshi, with the subtitle being “The Search for Prosperity”. Vijay Joshi has done all kinds of awesome sauce things over a long and distinguished career, and a 500 word limit will not begin to do justice to his many accomplishments. Suffice it to say that reading this book is well worth your time if you are interested in India’s growth story.

But to go back to the quote above: the author is saying, as is everybody else, that growth is important, indeed crucial, from an Indian context. That’s the rapid part. However, we also need to make sure that the growth is inclusive. Which means it’s not just important to bake a larger cake, but it is also important to make sure that every gets a slice (and preferably, as equal a slice as possible). There are many ways to accomplish this, and we don’t always do a perfect job in this regard but here’s the most important bit: we have to bake a larger cake first! Distributing a very small cake equally isn’t the point.

Stable implies growth that happens in steady fashion, not haphazardly, not in fits and starts. Put another way, steady growth over a decade is better than rapid growth for the first five years and no growth for the other five. Listen closely, and you can hear the sound of every RBI governor alive nodding his head ever so vigorously.

Sustainable would mean environmentally friendly. That’s a separate book in and of itself, but what we want is a rapidly growing country that has breathable air, drinkable water and arable land 100 years from now. Some might say that’s a contradiction in terms, but we won’t wake that particular beast just yet.

And the last bit? …within the framework of liberal democracy is treated as being almost axiomatic by Vijay Joshi, and in my opinion, rightly so. Sure, we grow slower as a consequence of our choice of a liberal democracy, but if that’s the price for political freedom, it is certainly worth it.

But I’d much rather that we work towards achieving rapid, stable, sustainable and inclusive economic growth within the framework of a liberal democracy, than achieving rapid GDP growth.

It’s a longer definition, but a better target.

 

What does economics have to say about (the emergence of) Mr. Trump?

It might seem like a rather weird topic for a blog called Economics for Everybody to think about, but what explains the rise, and the seemingly inevitable ascent to the Presidency of the USA, of Mr. Trump?

This blog post isn’t about the politics of Mr. Trump, endlessly fascinating a topic though it is. It is instead about an attempt at looking at the economic factors that caused this phenomenon to occur at all.

And one cause is related to this:

Of the jobs lost during the recession, about 60 percent of them were in what are called “mid-wage” occupations. What about the jobs added since the end of the recession? Seventy-three percent of them have been in lower-wage occupations, defined as $13.52 an hour or less.

That is pulled from a book written by Tyler Cowen, called Average is Over. Read the whole book, it is worth the price of admission. But the trend that is highlighted in this book is the trend that is causing the rise and rise of Mr. Trump.

One, there are likely to be fewer jobs for all of us in the future. Two, those jobs that do exist are not going to pay very well at the bottom of the pyramid. One shouldn’t describe a book in two sentences, but that’s the quick summary of Average is Over.

Here’s the thing, though: machines don’t vote. People do. And who do you think those seventy-three percent in the block-quote above are going to vote for? For the guy who promises to cure their problems by – well, by curing their problems.

Mr. Trump’s solutions might not win him an academic degree in economics, but that’s not the race he’s running. The race he’s running is being judged by the people who have mostly lost in this era of globalization, and according to some of them, he’s doing just fine. If this “disenchanted” group turns out to be large enough, and motivated enough, Mr. Trump stands a very real chance of becoming President Trump by year end.

The disenchanted workers of the globalization era is not a new idea, far from it. And there is a lot more to the idea than what has been written here. The reason I’m writing about it now, and the reason I’m highlighting this one factor above all else,  is because old theories are beginning to receive fresh validation,  and that makes it an exciting time to be an analyst.

Being a global citizen right now, on the other hand, might well raise the demand for blood pressure pills.

Why do Bhai’s films never fail?

I haven’t seen Sultan yet, and I may end up not watching it, but I have seen my fair share of Bhai films (it’s only a matter of time before it becomes a genre by itself, capital B and all). And they’re entertaining, there’s no doubt about that.

As an economist who’s learnt about rational human beings though, there’s a lot that causes befuddlement where Bhai movies are concerned. In this post, though, I’m just focusing on one of these aspects: first weekend prices for Bhai movies.

Apparently, they’ve gone as high as 1200 per seat. Now, you might say, if you’re a Bhai acolyte, that it’s just because demand tends to be so high for His films. But it’s not just high demand (and this is what this post is all about), it’s also about inelastic demand.

Us economists are big on elasticity, and you’re about to find out why. Elasticity (or sensitivity) is simply the percentage by which demand goes down when prices go up. If, for a little change in price, there is a very large change in demand, we say a good is very price elastic. If, on the other hand, no matter what the change in price, demand stays the same, we say a good is very price inelastic.

Think cigarettes. Or Bhai films. Same story.

Now, demand can change because of a lot of things. It can change because income goes up or down, for example. A family that sees a drop in income might cut back on eating out (high income elasticity), but will not cut down on medicines (low income elasticity). It can change because the price of other goods goes up or down (drinking lesser chai because the prices of sugar have gone through the roof, or drinking more coffee because the prices of chai have gone through the roof).

All of these are examples of demand for a good changing (or not) because of a change in the price of that good, an associated good, or income. And that’s all elasticity is.

Of course, as recent events have proved, the demand for Bhai’s films is inelastic insensitive to what he says as well, but that’s a whole different story, okay?