Imports and GDP: This Stuff Matters!

I’ve done an earlier version of this post, but have tried to simplify it even further in what follows.

Let’s go back and take a look at a concept that most of us are familiar with, but perhaps don’t know well enough (myself included!): GDP.

What is GDP?

That’s an easy question to answer, and one that every student of Econ101 more or less memorizes:

The final value of all goods and services produced in an economy in one accounting period.

Check out this definition from Wikipedia, this one from the OECD, this one from the IMF,  or run a search yourself – they’ll all be more or less the same.

Now, you can measure GDP in more than a couple of ways, but the version that most students of economics are definitely familiar with is the expenditure approach. It says that GDP is measured by tallying up the total expenditure used to buy final goods and services.

You might be familiar with this equation, for example:

GDP = Consumption + Investment + Government Spending + Exports – Imports

Or, to give this equation its abbreviated version:

GDP = C + I + G + X – M

Now, this is where things begin to get a little tricky.

This equation, and the way it is written out, leaves a lot of people under the impression that a country’s income will go up, if only we imported less as a country. 

And it is an understandable position to take! If we imagine that M has a value of, say, 100, then GDP goes down by 100. If M were to be zero instead, GDP would be higher by hundred in this alternate scenario.

But this is wrong! I’m going to use two different ways to show you why this is wrong.

Here’s the first one: go back to the definition of GDP, at the top of this piece. Now that you’ve read it, answer this question: where are imports produced? Are they produced in our country, or are they produced in another country?

And if they’re produced in another country, should they be included in our GDP?

The reason the equation says minus M is because we shouldn’t be counting it in GDP in the first place. Once we remove imports, we’re left with the very definition of GDP: goods and services produced in an economy in a given time period. 

Subtracting imports doesn’t make GDP higher. Adding it is completely wrong accounting.

All right, fine, you might grudgingly say. But then why is it in the equation at all in the first place?

Fair question! 

If you are an American, living in America, and you buy a smartphone manufactured in China, that would count as an import (M). 

But here’s the thing: it would also count as consumption ( C ). 

Think about it: if you are using the expenditure approach to measure GDP, your purchase of a Chinese manufactured smartphone is consumption, and it is also an import.

If the American government were to import binoculars manufactured in Israel, it would be government expenditure (G). But it would also be imports (M). You could make similar arguments for investment (I) as well, but you get the idea now.

So, a longer, but more accurate and understandable way of writing out the expenditure method of GDP is as follows (hat-tip to Noah Smith for this version):

GDP = Domestically produced consumption + Imported consumption + Domestically produced investment + Imported investment + Government spending on domestically produced stuff + Government spending on imported stuff + Exports – Imports

Now, some simple crossing out of terms…

Gross Domestic Product = Domestically produced consumption + Imported consumption + Domestically produced investment + Imported investment + Government spending on domestically produced stuff + Government spending on imported stuff + Exports – Imports

…leaves you with this:

Gross Domestic Product = Domestically produced  consumption + domestically produced investment + Government spending on domestically produced stuff + Exports

That first version, with all the crossed out terms, is how we should really be writing it out all the time, because that is what economists really mean. But we don’t do that, unfortunately, leaving folks with the entirely understandable impression that reducing imports makes us richer.

But hey, now you know! GDP, by definition, has nothing to do with imports, and the reason we subtract imports out is because we’re adding them in while counting consumption, investment and government expenditure.

Imports, Exports and GDP

“The key is to understand that imports are also included in consumption, investment, and government spending. The real GDP breakdown looks like this:

  • GDP = Domestically produced consumption + Imported consumption + Domestically produced investment + Imported investment + Government spending on domestically produced stuff + Government spending on imported stuff + Exports – Imports

So you can see that while imports are subtracted from GDP at the end of this equation, they’re also added to the earlier parts of the equation. In other words, imports are first added to GDP and then subtracted out again. So the total contribution of imports on GDP is zero.”

That is an excerpt from a lovely little write-up by Noah Smith on his Substack, and one that I’ll be using whenever I teach macro. It’s lovely for many reasons, but most of all for the reason that the bullet point goes a very long way towards making the point that a lot of folks miss: you don’t get rich by importing less.

When I say “you”, I mean the country in question – and this equation, written out this way, helps us understand why. If you’re a student of macro, and are under the impression that India will get richer if only we imported lesser, think about the definition of GDP:

Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.

https://www.investopedia.com/terms/g/gdp.asp

If you think about it, how can imports possibly qualify as being produced within a country’s borders? As Noah says, the equation can also be written like this:

GDP = Domestically produced consumption + Domestically produced investment + Government spending on domestically produced stuff + Exports

https://noahpinion.substack.com/p/imports-do-not-subtract-from-gdp?s=r

Read the rest of Noah’s post, especially if you are a student of macroeconomics. It should help clear up a lot of basic, but important and often misunderstood ideas about GDP calculations.


https://www.economist.com/finance-and-economics/2022/05/13/russia-is-on-track-for-a-record-trade-surplus

Russia has stopped publishing detailed monthly trade statistics. But figures from its trading partners can be used to work out what is going on. They suggest that, as imports slide and exports hold up, Russia is running a record trade surplus.
On May 9th China reported that its goods exports to Russia fell by over a quarter in April, compared with a year earlier, while its imports from Russia rose by more than 56%. Germany reported a 62% monthly drop in exports to Russia in March, and its imports fell by 3%. Adding up such flows across eight of Russia’s biggest trading partners, we estimate that Russian imports have fallen by about 44% since the invasion of Ukraine, while its exports have risen by roughly 8%.

https://www.economist.com/finance-and-economics/2022/05/13/russia-is-on-track-for-a-record-trade-surplus

Think about the previous section, and try and answer this question: is Russia poorer or richer or unchanged because Russia isn’t importing as much, as measured by GDP and changes in GDP?

Well, Russia may be worse off, and Russians may be worse off. It’s leader?

As a result, analysts expect Russia’s trade surplus to hit record highs in the coming months. The iif reckons that in 2022 the current-account surplus, which includes trade and some financial flows, could come in at $250bn (15% of last year’s gdp), more than double the $120bn recorded in 2021. That sanctions have boosted Russia’s trade surplus, and thus helped finance the war, is disappointing, says Mr Vistesen. Ms Ribakova reckons that the efficacy of financial sanctions may have reached its limits. A decision to tighten trade sanctions must come next.
But such measures could take time to take effect. Even if the eu enacts its proposal to ban Russian oil, the embargo would be phased in so slowly that the bloc’s oil imports from Russia would fall by just 19% this year, says Liam Peach of Capital Economics, a consultancy. The full impact of these sanctions would be felt only at the start of 2023—by which point Mr Putin will have amassed billions to fund his war.

https://www.economist.com/finance-and-economics/2022/05/13/russia-is-on-track-for-a-record-trade-surplus (Emphasis added)

Macro is hard! But it also matters, especially at times such as these.

About This Measurement Business

(C) GDP figures are “man-made” and therefore unreliable, Li said. When evaluating Liaoning’s economy, he focuses on three figures: 1) electricity consumption, which was up 10 percent in Liaoning last year; 2) volume of rail cargo, which is fairly accurate because fees are charged for each unit of weight; and 3) amount of loans disbursed, which also tends to be accurate given the interest fees charged. By looking at
these three figures, Li said he can measure with relative accuracy the speed of economic growth. All other figures, especially GDP statistics, are “for reference only,” he said smiling.

https://wikileaks.org/plusd/cables/07BEIJING1760_a.html

This is an excerpt from the Wikileaks archive, and people familiar with modern economic history will know it all too well. This is, of course, the famous Li Keqiang index. If you prefer, you can read the original Economist article about it, although for once, the trademark Economist pun in the headline falls short of their typically high quality.

GDP measurements have always been tricky, and reading about GDP – it’s evolution, the data collection, the computation and the hajjar problems that arise from there – should be mandatory for any student aspiring to learn economics. Here’s a post from six years ago about some sources, if you’re interested.


But back to that excerpt above. What Li Keqiang was saying was that GDP statistics in China would often give a misleading picture, and he preferred to reach his own conclusions on the basis of other economic data. His preferred metrics were the ones mentioned in the abstract above: electricity consumption, volume of rail cargo and loans disbursed. Think of it this way: he’s really asking three questions. Is stuff being produced? Is stuff being moved around? Is stuff being purchased?

But what about covid times? Do these measures stand up, or do we need new proxies for GDP?

The variant’s speed also means that China’s economic prospects are unusually hard to track. A lot can happen in the time between a data point’s release and its reference period. The most recent hard numbers on China’s economy refer to the two months of January and February. Those (surprisingly good) figures already look dated, even quaint. For much of that period, there was no war in Europe. And new covid-19 cases in mainland China averaged fewer than 200 per day, compared with the 13,267 infections reported on April 4th. Relying on these official economic figures is like using a rear-view mirror to steer through a chicane.
For a more timely take on China’s fast-deteriorating economy, some analysts are turning to less conventional indicators. For example, Baidu, a popular search engine and mapping tool, provides a daily mobility index, based on tracking the movement of smartphones. Over the seven days to April 3rd, this index was more than 48% below its level a year ago.

https://www.economist.com/finance-and-economics/omicron-is-dealing-a-big-blow-to-chinas-economy/21808576

But as the article goes on to say, this metric will tell you about movement across cities. But metro traffic gives you an idea of intra-city mobility, as do courier company express deliveries (and we did some very similar exercises in India during the lockdowns, of course. Here’s one example for Pune district.)


But the point isn’t just to come up with what else might be useful as GDP proxies. A follow-up question becomes equally important: do the GDP statistics make sense? As the Economist articles says, good numbers for metrics such as investment in fixed assets are hard to square with declines in steel output. The article contains many other such examples, and what you should take away as a student is your ability to develop a “smell” test for a given economy. Don’t take the reported numbers at face value, but “see” if they seem to be in line with other statistics about that economy.

I really like this article as an introduction to this topic because it also hints at how statisticians need to be especially careful about comparing data over time. Weekly declines might happen because of festivals, bad weather or a thousand other things, which may of course be going on along with pandemic induced lockdowns. Teasing out the effects of just one aspect isn’t an easy thing to do.

And finally, think about how you can apply this lesson in other domains! Should an interviewer look only at marks, or try and figure out other correlates. Or, as Mr. Keqiang puts it, are marks “for reference only”? What about quarterly earnings reports? Press releases? Smell tests matter, and the earlier you start developing them, the better you get at detecting, and calling bullshit.


And finally, the concluding paragraph from the article we’ve discussed today:


To help avoid some of the traps lurking in these unconventional indicators, Mr Lu and his team watch “a bunch of numbers, instead of just one”. In a recent report he highlighted 20 indicators, ranging from asphalt production to movie-ticket sales. “If seven or eight out of ten indicators are worsening, then we can be confident that GDP growth is getting worse,” he says. Right now, he thinks, the direction is clear. “Something must be going very wrong.”

https://www.economist.com/finance-and-economics/omicron-is-dealing-a-big-blow-to-chinas-economy/21808576

Indeed.

India and China’s GDP Components Over Time

This should go without saying, but ask yourself if you are able to recreate these charts given the data sources mentioned in the tweet. You needn’t use DataWrapper necessarily (although if you’re considering journalism or a related field, learning it will help) – but do see if you can create the chart!

V Ananta Nageswaran on the IMF’s Medium-Term Forecasts for India and China

If you are an undergrad or post-grad student in India studying economics, you’ve no doubt been taught how to think about GDP (ways to measure it, ways to define it, its limitations, its advantages). But if you ask me, what we fail to do enough of is explain to students how one is supposed to use these concepts.

I often tell my students that GDP for a nation is like grades/marks obtained by a student. In much the same way that grades are not an accurate reflection of all of what a student has done in an academic year (even in purely an academic sense), GDP isn’t an accurate reflection of what a country has earned in a given time period. But also in much the same way that we have not been able to come up with a better way to assess students, we have not been able to come up with a better way to measure the economic output of a nation.

So while keeping in mind the fact that the measure isn’t perfect, but also that there isn’t a better measure in place just yet, let’s go ahead and read V Ananta Nageswaran’s excellent column in the Livemint about India and China’s medium term forecasts by the IMF.

What I am going to do below is highlight some sentences from this column and pose questions on the basis of these excerpts. Try and answer these questions, especially if you have been taught macro in your college/university. To my mind, this will go a very long way towards helping you understand if you have, well, understood key macroeconomic concepts:

  1. The International Monetary Fund (IMF) publishes its World Economic Outlook (WEO) twice a year after its Spring and Autumn meetings.

    Have you read the latest edition? If nothing else, take a look at the executive summary.
  2. “However, since then, many private-sector economists have upgraded their forecast for India’s economic growth this financial year to more than 10%, based on more recent and real-time indicators including mobility data.”

    What might a list of such indicators look like? Here’s a place to get started.
  3. “In October, India’s nominal GDP for 2026-27 was projected at ₹392.84 trillion and $4.393 trillion. In the April WEO edition, the corresponding forecasts were ₹389.01 trillion and $4.534 trillion. So, secondary-school arithmetic will tell us that the Fund has become relatively more pessimistic on the Indian rupee versus US dollar (USD) in October than in April. From 70.9 in 2020-21, the Fund sees the rupee depreciating to 89.4 against the US dollar by 2026-27. In April, the implied exchange rate forecast for 2026-27 was 85.8. So, the US dollar is stronger by 4.2% at the end of 2026-27 as per the October 2021 forecast versus April’s. The effect is that India’s nominal GDP in USD terms in 2026-27 is $140 billion lower than the April forecast.”

    Can you go back to the report and find out how the author reached these numbers? Do you agree with his calculations? Can you explain these calculations to somebody else? Do you find yourself able to write paragraphs like these? If not, what do you think you need to learn?
  4. “When it comes to forecasting exchange rates, the literature informs us that economic fundamentals do a poor job for any horizon under three years.”

    What might this mean in terms of statistical concepts? What does this tell you about how to think about long term investing (in financial assets, people and entire nations)?
  5. “Of all the economic fundamentals that influence exchange rates, the one enduring factor is the inflation differential.”

    Which are the other economic fundamentals that influence exchange rates? What is the inflation differential? Why does the author say that this particular factor is an enduring one?
  6. This is a truly remarkable graph, and worthy of thinking about deeply. Why does it look the way it does? Is this a good thing or a bad thing? For whom, exactly, and over what time horizon?
  7. “So, for any USD-INR forecast, higher inflation rates in India over the US that have been the default factor for the past few decades cannot form the basis. The Fund may have to revisit its implicit forecasts for USD-INR in April 2022.”

    Do you agree with the author’s assessment that inflation in India may not necessarily be higher than in the United States? Why or why not? With what implications beyond GDP calculations?

I’d recommend that you try and figure out the answers to these questions yourself, or even better, with a group of like-minded people. Run them past your prof(s), and see what they have to say. Wwrite up/record your answers and put ’em up for public consumption.

And best of all, try to come up with more such questions yourselves!

The Olympics and Economics

There’s something inexplicably uplifting about sporting success. Not only does it inspire — even if fleetingly — at an individual level, it fosters national pride, a feeling rarely experienced in our networked world of partisan sniping. India’s best-ever performance at the Tokyo Olympics gave me, you, and millions of other Indians a reason to chin up in these challenging times.

https://publicpolicy.substack.com/p/139-a-question-of-sports?

So begins Pranay’s essay today from his (and RSJ’s) excellent newsletter, Anticipating the Unanticipated. The essay is a rumination on the role of government in sports, and as Pranay rightly points out, the implicit assumption that most of us make is that government should play a bigger role in fostering an environment more conducive to sporting excellence.

“Fostering an environment more conducive to sporting excellence” ought to at least get me an interview with a consulting firm, so I’ll translate that into plainspeak. The government should spend more, and work more on building out better sporting facilities, hiring better coaches, paying our sportspeople more, and more besides – all so that we win more medals.


Pranays disagrees with this view (and I agree with Pranay). This job, he says, is best left to markets and society.

Consider the role of markets first. Not too long ago, cricket would be criticised by players of other sports for hogging all the popularity, attention, and resources. And then a commercial, entertainment-focused enterprise such as the IPL turned this argument on its head. The city-based league format pioneered in India though IPL proved to be a positive-sum game for other sports. It spawned similar leagues in several sports, even managing to bring back Kabbadi to primetime TV screens. This commercial model energised many sports in ways that no government medals could have done.
At the amateur level, reforms in India’s FDI policy finally brought world-class sporting retailers such as Decathlon to India. Earlier, the sports retailing scene was stagnant, with few old-style shops only catering to demands of select, mass-market sports. By getting out of the way, the government helped change the sports equipment landscape for millions of budding sportspersons in the country. In short, markets are critical to lasting sporting success.

https://publicpolicy.substack.com/p/139-a-question-of-sports?

I agree, for the most part, but with government support, about which I’ll write more in a bit. Pranay also makes the case for the third pillar to do its bit:

Take the role that the MRF Pace Foundation has played in producing fast bowlers in India. Or the contribution of the Tata Group in improving hockey facilities in Odisha. We need many more philanthropic initiatives of this nature.
Besides the well-established corporates, there are smaller non-profit organisations such as the GoSports Foundation and Olympic Gold Quest. These organisations sponsor and support talented Indian sportspersons so that they can become world-class. Perhaps, we need hundreds of such societal initiatives outside the government to achieve sporting excellence.

https://publicpolicy.substack.com/p/139-a-question-of-sports?

By the way, here’s a good (and fairly straightforward) paper to read on this issue:

Every four years it begins anew, the hand-wringing and finger-pointing over a poor showing at the Olympics. The only real uncertainty is which countries will feel the sharpest disappointment over their poor performances. After the
Barcelona Olympics, a headline in the New York Times read “Despite its 108 medals, U.S. rates mixed success.” In 1996, headlines in London trumpeted “Olympic shame over Britain’s medal tally” and “Britain in danger of being left at the starting line,” while in Mexico, Japan, Singapore, Colombia and Egypt, medal totals below expectations led to national self-examinations. After Sydney, in Canada the Globe and Mail bemoaned “Canada’s Olympic fears come true: Despite a few bright spots, athletes not only won fewer medals, they performed below their own and nation’s expectations.” In this paper, we ask the straightforward question of how many medals countries should be expected to win by considering what factors influence national Olympic success

https://www.nber.org/system/files/working_papers/w7998/w7998.pdf

Read the whole paper, of course, but here’s a key bit:

Over time, a country’s real GDP remains the single best predictor of Olympic performance. Population and per capita GDP contribute equally at the margin implying that two countries with identical levels of GDP but different populations and per capita GDP levels will win the same number of medals. While GDP is most of the story, it is not the whole story. Host countries typically win an additional 1.8 percent of the medals beyond what would be predicted by their GDP alone. The forced mobilization of resources by governments clearly can also play a role in medal totals. On average, the
Soviet Union and Eastern Bloc countries won a share of medals higher by 3+ percentage points than predicted by their GDP

https://www.nber.org/system/files/working_papers/w7998/w7998.pdf

As Pranay mentions in his newsletter, sure you could sponsor projects of national pride, but the opportunity costs are far too high.1.

But ultimately, economic well-being is a good predictor of doing well in the Olympics. So what can (and more importantly, should) a government do about increasing the tally of medals at the Olympics?

As with much else in life, just one thing:

  1. Grow the economy as rapidly as possible

… but that being said, help (state, markets or communities – or all three) is needed. This video, via MR (and remember, this is the USA), shows how difficult the economics of being an Olympian are:

If you can afford to help out, please do! 🙂

  1. He doesn’t put it like that, the phrasing is mine[]

A Summer Spent Doing Macroeconomics

Say you’re a student, and you’ve just finished learning a fair bit about macroeconomics. You’ve read and not understood Keynes, you’ve read and think you’ve understood Friedman, and you don’t have the faintest idea what folks in macro have been up to since Robert Lucas.

OK, all that is fine, but how should a budding macroeconomist spend her summer this year?

You could do a lot worse than reading this article, and asking yourself some simple questions.

Such as, do I hear you say? Read on!


Google mobility, for instance, is down more than 40 per cent since the start of April and currently at levels seen a year ago, when the national lockdown was in effect. This dynamic is also visible in the cross-section: states that forced down mobility more strongly have, in general, also seen a larger drop in positivity rates.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

What is Google Mobility? What does the data for India look like? How does this data correlate with statewise Covid-19 numbers? Can I create simple tables and charts in, say, Google Sheets that show a link between the two? And write up a blog about how I did it? Or maybe create YouTube tutorials that show how I did it?


That said, there’s growing evidence the impact will not be trivial even if not of the same scale as the first wave. By the middle of May, power demand was down 13 per cent and vehicle registrations were down 70 per cent compared to the start of the quarter, while e-way bills in the first half of the month were at 40 per cent of where they should be. A broader composite index would suggest activity is tracking a 6-7 per cent sequential decline this quarter and, while this is much shallower than the 25 per cent sequential contraction witnessed last year this time, the fact that it comes on the heels of the first shock, and can potentially trigger more hysteresis, remains a source of concern.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

Where does the data for power demand come from? Where does the data for vehicle registration come from? Where does GST data come from? What does the phrase “tracking a 6-7 percent sequential decline” mean? What is hysteresis?


Household income uncertainty and precautionary savings can be expected to rise. Even before the second wave, households had signalled caution about future spending (manifested in the RBI Consumer Confidence Survey) likely reflecting both an income hit and a precautionary savings motive. This behaviour is consistent with labour market dynamics wherein the unemployment rate, once adjusted for reduced labour force participation, had increased meaningfully even before the second wave.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

What is the RBI Consumer Confidence Survey? How is it calculated (see Annexure A in this document)? Where do we get unemployment data from?


Private investment could also take time to pick up. Even before the second wave, utilisation rates were in the mid-60 per cent range, much lower than needed to jumpstart investment.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

What is OBICUS? It stands for Order Book, Inventory and Capacity Utilization Survey. How else do we track capacity utilization?


We have previously found a strong elasticity of India’s exports to global growth and, if that holds, this should drive a strong export rebound in India. Some of this is already visible in the data with manufacturing exports surging in recent months, and currently 18 per cent (in nominal dollar terms) above pre-pandemic levels.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

Where might that paper/research be, the one that talks about the strong elasticity of India’s exports to global growth? What does it tell us? What is different between the time that paper was written and today? Is that to India’s advantage or not? How do we tell?


If crude prices average close to $70 this fiscal year, as is expected, that would constitute a 50 per cent increase over last year and serve as a negative terms of trade shock that impinges on household purchasing power and firm margins — a process already underway.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

EIA? Or something else? Should we take lagged data? If yes, with what lag? If no, why not? Where do we get information on firm margins? Bloomberg/Reuters? If yes, do we have access to a terminal? If no, whom do we ask for a favor?


When all is said and done, the completeness of an economy’s recovery from Covid-19 — and therefore the level of scarring — is assessed by comparing its post-Covid-19 path of the level of GDP with the path forecasted pre-Covid-19. If the aforementioned forecasts fructify, the level of quarterly GDP at the end of this year would be about almost 8 per cent below the level forecasted pre-pandemic. To be sure, India will not be the only emerging market to be below its pre-pandemic path. In fact, among the large economies, only the US and China will surpass it. But that said, an 8 per cent shortfall is meaningful.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

What is the level of GDP, and how is it different from the growth rate of GDP? Which should one use, and how does the answer change depending on the context? Where do we get data on GDP of all countries at one time? Which one of these measures should we use for comparison, and why?


Macro is hard, and in many different ways. Understanding the theory is hard, but piecing together parts of the puzzle from disparate (and at lest in India, gloriously unfriendly) data sources is perhaps harder still. But if you want to “do” macro for a living, being familiar with the answers to these questions is table stakes.

That is, getting familiar with the answers to the questions I have asked here gets you the right to sit at the table. Playing the game better than the others once you’re in is a whole different story. And playing the game means using this data with your knowledge of theory to try and take a stab at the really important questions:

The question, therefore, is how should economic policy respond to this second shock? With fiscal and monetary policy already quite expansive, is there space to respond further? We assess policy options and tradeoffs in a companion piece tomorrow.

https://www.business-standard.com/article/opinion/a-recovery-interrupted-121052300845_1.html

Trust me, macro is hard.

India, Bangladesh, GDP. Sigh.

When I explain GDP to folks unfamiliar with the concept, I often use the analogy of marks.

“Do you”, I intone in the most professorial voice I can muster, “remember how many marks you scored in your math exam when you were in the 4th grade?”

The point behind asking that question is to help the class realize that there were many other things going on in their life in the 4th grade. The measurement of how well you did on the specific questions you were asked in that test on that day do very little to show you how much math you actually learnt that year. Leave alone, of course, the question of how little the math test had to do with all of what you learnt while you were in the 4th grade.

A similar point was made about GDP recently, in the Business Standard:

Take GDP first. In India, we don’t measure the output of 65 per cent of the economy and make only well-informed guesses about the remaining 35 per cent.

https://www.business-standard.com/article/opinion/the-10-year-upa-nda-scorecard-120102400048_1.html

That’s exactly right, of course. You shouldn’t obsess over GDP numbers, much like you shouldn’t obsess over grades. But we do obsess over both!

And the analogy between marks and GDP works really well especially now, because when it comes to GDP, we now have a Sharmaji ka beta in the neighbourhood.

Hello, Bangladesh.

About two years ago, India’s Home Minister Amit Shah spoke of “infiltrators” who were hollowing out the country “like termites”. A Minister from Bangladesh retorted that Shah’s statement was “inappropriate”, “unwanted”, and “not based on information”. The IMF’s recent per capita GDP projections for South Asian countries show that the alleged ‘termite factory’ is shining — Bangladesh, which has been doing better than both India and Pakistan on social and human development indicators for several years now, is also beginning to march ahead on the economic front.

https://indianexpress.com/article/explained/an-expert-explains-how-bangladesh-has-reduced-gap-and-is-now-projected-to-go-past-india-6906206/

In much the same way that you shouldn’t compare marks obtained by students, you really shouldn’t compare GDP per capita between nations.

But (and you knew there was a but coming along, didn’t you), as I also say in my classes – what else you got, eh? It’s all well and good to say we shouldn’t, but it’s not like we have readymade alternatives. And if you take the GDP factory away from us economists, how do we fill our days?

TCA Srinavasa-Raghavan, in the same column cited above, has three answers:

Only three things: Food inflation, because it has a direct bearing on welfare; foreign exchange reserves, because they serve as a powerful signalling device to foreign investors and sellers of goods; and the revenue deficit. These are the only things the Centre has total control over. In determining all other indicators, the states play a big role.

https://www.business-standard.com/article/opinion/the-10-year-upa-nda-scorecard-120102400048_1.html

Read the whole article (which, I’m sorry, may well be behind a paywall). I don’t necessarily agree with all of it, about which more below, but the point that GDP is overrated as a useful barometer for the state of the economy is a point I agree with wholeheartedly.

TCA’s suggestions about what is to be used instead (food inflation, the revenue deficit and forex reserves) are worth considering, but there is a long list of alternatives that have been suggested. Here is just one example:

Provincial officials have long been suspected of overstating growth. Adding their figures together suggests that China’s economy was $364 billion bigger in 2009 than the total in the national accounts. Mr Li preferred to track Liaoning’s economy by looking at other indicators: the cargo volume on the province’s railways, electricity consumption and loans disbursed by banks.

https://www.economist.com/asia/2010/12/09/keqiang-ker-ching

Other folks may come up with other things to use as a proxy for measuring the state of the economy, but really, it is the old story of the six blind men and the elephant all over again. Whatever you use will give you only a limited picture. That’s just the nature of the beast.

Worse! Whatever you agree to measure instead of GDP immediately becomes susceptible to Goodhart’s Law:

In a paper published in 1997, Anthropologist Marilyn Strathern generalized Goodhart’s law beyond statistics and control to evaluation more broadly. The phrase commonly referred to as Goodhart’s law comes from Strathern’s paper, not from any of Goodhart’s writings:

When a measure becomes a target, it ceases to be a good measure.

https://en.wikipedia.org/wiki/Goodhart%27s_law

(Emphasis added)

So sure, you could ask that food inflation, revenue deficits and forex reserves be the target. But it’ll just be cobras or rat tails all over again.

So GDP, whether you like it or not, whether its measurement is favorable or not, is not going to go away anytime soon, whether in India or elsewhere.

Consider the concluding paragraph from a column in the Livemint yesterday by R Jagannathan:

This does not make GDP calculations worthless, but the real focus should be on sectors. More than macroeconomics, sectoral understanding and microeconomics ought to be central to policy-making. Future GDP will best be estimated as a sum of its parts, and not as a whole extrapolated from numbers in the more visible parts of the economy.

https://www.livemint.com/opinion/online-views/the-fallacy-of-equating-growth-with-the-pursuit-of-higher-gdp-11603811210462.html

Yes, well, sure. Absolutely.

Now if only we could figure out the how.

A paper by Barro et al about mortality and economic performance in 1918

A working paper from Barro et al about the potential effects of the coronavirus on mortality and economic activity. I learnt of the paper via Tim Taylor’s blog. Quick points of note below:

  • Their estimate is of 39 million deaths, while Laura Spinney says anywhere between 50 million to a 100 million. Basically, we don’t know – but a lot!
  • I learnt of this data source. India is missing, but there is still a lot to learn.
  • Assuming they get their 39 million number right, they say that India saw 16 million deaths. About 43% of all deaths worldwide, as per their estimate.
  • Roughly 1/3rd of the world got the flu. 2% mortality rate of all people on the planet, 6% of those who got it.
  • Below is the conclusion from their regression analyses:

 

Further, this death rate corresponds in our regression analysis to declines in the typical country by 6 percent for GDP and 8 percent for consumption. These economic declines are comparable to those last seen during the global Great
Recession of 2008-2009. The results also suggest substantial short-term declines in real returns on stocks and short-term government bills. Thus, the possibility exists not only for unprecedented numbers of deaths but also for major global economic dislocation

This is a working paper, subject to change, and the data is unreliable at best. But the bootom line is that this will at least be as bad as 2008-2009 in terms of economics, maybe worse. And let’s hope and pray that given our capability to deal with health issues, relative to 1918, our mortality rates are nowhere near as bad.

Social distancing matters.

RoW: Links for 8th January, 2020

Five links today to articles that were written recently about how things might pan out in 2020. Sticking one’s neck out and making predictions is difficult enough for relatively small issues – trying to guess where the global  economy might end up is something I would never want to do. Kudos to those who try!

  1. “As tempting as it is to dwell on current financial and macroeconomic conditions, doing so risks obfuscating a key element in the outlook for the future. There is a curious contrast between the relative clarity of expectations for the near term and the murkiness and uncertainty that comes when one extends the horizon further – say, to the next five years.
    […]
    Moreover, in the years ahead, the United States, having notably outperformed many other economies, will decide whether to continue disengaging from the rest of the world – a process that is at odds with its historic position at the center of the global economy.”
    ..
    ..
    Mohamed A. El-Erian wrote this article about the outlook for the global economy in the middle of December 2019, and well, things change quickly.
    ..
    ..
  2. “The uptick in global growth for 2020 is driven by emerging market and developing economies that are projected to experience a growth rebound to 4.6 percent. About half of this rebound is driven by recoveries or shallower recessions in stressed emerging markets, such as Argentina, Iran, and Turkey, and the rest by recoveries in countries where growth slowed significantly in 2019 relative to 2018, such as Brazil, India, Mexico, Russia, and Saudi Arabia. There is, however, considerable uncertainty surrounding these recoveries, especially when major economies like the United States, Japan, and China are expected to slow further into 2020.”
    ..
    ..
    This was written in October 2019, by Gita Gopinath. The IMF’s prognosis is one of a subdued recovery for the global economy as the best case scenario.
    ..
    ..
  3. “For the professional prognosticators and market mavens of Wall Street and beyond, there is at least one easy prediction to make about the next 12 months: Investors are going to earn less. A lot less, probably.“The double-digit returns of 2019 will be hard to repeat” is a phrase littering almost every investment outlook for global markets in 2020. Despite the trade war, political turmoil and more, virtually all major assets just posted a once-a-decade performance, and even uber-bulls know the chances of repeating the feat are slim.”
    ..
    ..
    Bloomberg thinks financial markets the world over will struggle to put in the kind of performance that we saw in 2019. A good summary of a lot of global outlooks.
    ..
    ..
  4. “In 2020 Asia’s GDP will overtake the GDP of the rest of the world combined. By 2030, the region is expected to contribute roughly 60% of global growth. Asia-Pacific will also be responsible for the overwhelming majority (90%) of the 2.4 billion new members of the middle class entering the global economy.The bulk of that growth will come from the developing markets of China, India and throughout South-East Asia and it will give rise to a host of new decisions for businesses, governments and NGOs. The pressure will be on them to guide Asia’s development in a way that is equitable and designed to solve a host of social and economic problems.”
    ..
    ..
    The World Economic Forum points to the fact (?) that Asia will produce more economic output than the rest of the world combined this year.
    ..
    ..
  5. “Just as the world economy was stabilizing after its worst performance in a decade, a U.S. airstrike in Iraq that killed one of Iran’s most powerful generals is a jolting reminder of how fragile the outlook remains.A tentative trade agreement between the U.S. and China had buoyed expectations that global growth would start to rebound this year. Business confidence has slowly been improving as key manufacturing gauges show signs of bottoming out.

    Now, the U.S.-Iran flare-up could nip any positive sentiment in the bud.”
    ..
    ..
    But, well. Happy new year!