Tag: gdp

Scott Sumner on “The Confusing China Debate”

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You should read yesterday’s post before tackling this one. Consider yourself warned!

Scott Sumner, whose post on China we’re discussing today, has a nice excerpt from the WSJ, which I’ll reproduce below:

Economists and investors have been calling on Beijing to make bolder efforts to boost output—especially by promoting consumer spending, if necessary, by offering cash handouts, as the U.S. did during the pandemic.
Accelerating China’s transition to a more consumer-led economy—such as that of the U.S.—would make growth more sustainable in the long term, economists say.
But top leader Xi Jinping has deep-rooted philosophical objections to Western-style consumption-driven growth, people familiar with decision-making in Beijing say. Xi sees such growth as wasteful and at odds with his goal of making China a world-leading industrial and technological powerhouse, they say.
Xi believes Beijing should stick to fiscal discipline, especially given China’s deep debt. That makes stimulus or welfare policies akin to those in the U.S. and Europe less likely, the people said.

https://www.econlib.org/the-confusing-china-debate/

He goes on to say that Xi is right when he says that welfarism ain’t right for China. But, he goes on to say, the economists are also right when they say that China needs stimulus. So if the government won’t give the meds but China needs the meds, then where do the meds come from? Monetary stimulus should step up to the plate, per Sumner.

GDP, as any first year student of econ will tell you, is C+I+G+NX. Well, any Indian student, at any rate, but that’s a whole other story. Look this up, if this is not familiar to you.

Scott Sumner says that this framing is problematic. Why problematic? Because if we economists see that I (investment) is down, and GDP needs to go up… well then, we’ll say that either C should go up or G should (or both). But Scott says that this is wrong. No policymaker, he says “could realistically have the information required to make that judgment.”

His point is that what we should be saying is that China needs to do less wasteful investment. China has a lot of “white elephants“. Stop building those out, and let the market work out what is needed. The Chinese government should encourage more private investment and discourage public investment.

Well… that’s a bit like saying that an alcoholic should not drink quite as much. Easy to say, difficult to make happen. This is not, to be clear, me making fun of Scott’s argument. I’m simply trying to give you an analogy that might make understanding this easier. In fact, Scott himself later on in his post says that he is describing what ought to happen in an ideal scenario:

Some might argue that my analysis is naïve because China is far from being a laissez-faire economy. Monetary stimulus won’t necessarily go into the most efficient sectors. I agree. I am describing the sort of outcome that China should be aiming for. Determining which policy levers to push requires an in depth knowledge of the current policy distortions that lead to a misallocation of resources. Thus monetary stimulus might be combined with banking reform to reduce moral hazard. The goal would be to reduce lending for nonproductive investments, such as dubious real estate projects. But again, that’s not aiming for “less investment”, that’s aiming for less wasteful investment.

https://www.econlib.org/the-confusing-china-debate/

I find myself in agreement and in disagreement with Scott’s post. Agreement because the advice is sound. Disagreement because there isn’t a snowball’s chance in hell of this happening. How does the Chinese government, of all institutions, credibly show that it will be a passive and benevolent spectator to market-driven investment? Remember, this is XI’s government!

So as a theoretical solution, sure. As a practical solution? Not so much. If you want the Chinese economy to get out of the situation it finds itself in, you have to come up with solutions that take into account the ground reality. And the ground reality is that the Chinese economy works at the pleasure of the Chinse government, and the Chinese economy is never quite sure about what the Chinese government will do next. So for the Chinese economy to muster up the courage to gather funds and deploy them on multi-year investment projects, and to trust that the Chinese government will do nothing to get in the way across all of those years is… well, not happening.

Scott Sumner knows China a million times better than I do, so of course he knows this. Don’t read his blog post as being indicative of what he thinks the Chinese government will do. Read it as what he things the Chinese government ought to do.

The real issues are using monetary policy to assure nominal stability, and moving to a more market oriented economy to insure economic growth and higher living standards for the future.

https://www.econlib.org/the-confusing-china-debate/

You may or may not agree with the first half of that sentence (I personally think there is room for fiscal policy along with monetary policy). Everybody agrees with the second half.

Everybody, that is, except the Chinese government.

More’s the pity.

Everywhere But In The Statistics

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That is, of course, part of a very famous quote by Robert Solow:

You can see the computer age everywhere but in the productivity statistics

http://www.standupeconomist.com/pdf/misc/solow-computer-productivity.pdf

And in a recent newsletter, Paul Krugman agrees:

…have the past few decades generally vindicated visionaries who asserted that information technology would change everything? Or have they vindicated techno-skeptics like the economist Robert Gordon, who argued in a 2016 book that the innovations of the late 20th and early 21st century were far less fundamental than those between 1870 and 1940?
Well, by the numbers, the skeptics have won the argument, hands down.

https://www.nytimes.com/2023/04/04/opinion/internet-economy.html

Paul Krugman goes on to show this chart:

https://www.nytimes.com/2023/04/04/opinion/internet-economy.html

I’ll tell you how to read this chart, but back up for a moment and learn about total factor productivity first:

Total Factor Productivity (TFP) is a measure of how much output an economy can produce using the same amount of inputs, like labor and capital.
In simpler terms, TFP is like a measure of how smartly an economy is using its resources to make things. It tells us how efficiently a country is using its workers, machines, and materials to create products and services.
TFP is important because it can help explain why some countries are richer than others. When a country can produce more with the same amount of inputs, it can grow faster and become richer over time.
Measuring TFP is tricky because it’s hard to tell how much of a country’s output is due to factors like capital and labor, and how much is due to other things like technology and innovation. To measure TFP, economists use complex models that take into account all the different factors that could be affecting a country’s productivity.
In the context of development economics and growth theory, TFP matters because it can help explain why some countries are able to grow faster and become richer than others. Countries that are able to improve their TFP can create more goods and services with the same amount of resources, which can lead to faster economic growth and higher living standards for their citizens.
To improve TFP, countries can invest in education and research, create better infrastructure, and implement policies that encourage innovation and entrepreneurship. By doing so, they can create a more productive and efficient economy that can grow and thrive over time.

chat.openai.com

So here’s the question to ask: did the advent of the internet allow us, as an economy, to get smarter at using our resources to make things? Paul Krugman’s chart answer this question by showing how TFP growth changed over the next twenty five years from each given date on the x-axis. So if in 1948, TFP growth was just below 2, what that means is that TFP growth over the period 1948-1973 was just below 2. So did TFP growth go up in a twenty-five year period following 1996? The chart clearly says no, it didn’t, and Paul Krugman says “Ha!“:

See the great productivity boom that followed the rise of the internet? Neither do I.

https://www.nytimes.com/2023/04/04/opinion/internet-economy.html

Here’s the paragraph that really stuck out for me, though, from Paul Krugman’s column:

For the fact is that while moving information around is important, we’re still living in a material world: Most of what we consume is physical stuff or in-person services, which haven’t been drastically affected by the internet.

https://www.nytimes.com/2023/04/04/opinion/internet-economy.html

Huh. Let’s try to think this through:

  1. Use your own example, as I am about to do below.
  2. Do you use online services, even when it comes to consuming physical stuff or in-person services? In my case, Amazon is where I buy most of my physical stuff from, or from Amazon’s competitors. But they all have an online presence, and that is my preferred mode of shopping.
  3. I much prefer to have my food delivered home via Zomato or its competitors. My consumption of music is via online streaming services, my consumption of video is via YouTube or via OTT, I don’t even have a cable connection at home. My consumption (and creation) of the written word is almost entirely online (blogs, Kindle, Twitter, newsletters in my inbox). A fair few chunk of my classes at various colleges are online every now and then.
  4. Calling a plumber home, or an electrician, is via Urban Company, or one of its competitors. Booking flight/train tickets, booking movie tickets, paying my daughter’s school fees, transacting with my bank – I can go on, but it’s mostly online.
  5. Software has eaten, I would say, most of my world.
  6. But I should ask if I am falling prey to confirmation bias. What is decidedly offline, for me, as a consumer?
  7. I should also be asking if I am truly representative of the average Punekar, let alone the average Maharashtrian, let alone the average Indian, and still lesser an average citizen of the world.

I would say this much: I’m fairly confident that the Internet has enabled more consumption of goods and services than was the case twenty-five years ago. As a sixteen year old in 1998, I can guarantee you that reading what Paul Krugman wrote a couple of days ago would have been a very hard thing to do! And I feel fairly safe in saying that at varying margins, this is true for a lot of people in Pune, in Maharashtra, in India, and indeed in the whole world. Those margins will likely be influenced by per capita income in each country, by whether you stay in a more (or less) urbanized part of the world, and by a whole host of other factors. But as a species, a lot of our consumption of even physical goods or in-person services has been impacted by the advent of the internet.

I’m very curious to hear from you, especially if you disagree. Please tell me what I’m missing out on!

But that makes Paul Krugman’s chart even more puzzling! I’m tempted to disagree with him based on what I’ve written above, but I’m not sure how to disagree with the chart.
What about you?

Measuring GDP is hard.

Paul Krugman’s post ends with a few cool references, and since it’s behind a paywall, I’m listing them over here:

First, a nice YouTube video on washing machines and the internet:

Second, a simple explainer on TFP.

Third, a lovely book by Robert Gordon which you absolutely must read.

Final point: how to get better at measuring GDP is (and will likely continue to be for a very long time) a fascinating problem, and I will definitely write more about it in future posts. But in the meantime, if you have any recommendations about what to read/listen/view, please do share!

All About GDP

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If you are a student of economics in India, you should set up a calendar for yourself. This calendar should include the date of the release of important information about the Indian economy – and the 28th of February is one such day. Why? Because that is when we get to know what went on in the third quarter when it comes to India’s GDP (and more GDP related information besides).

In today’s blogpost, I want to ask you ten questions. If you are a student of the Indian economy, you should try and figure out the answers to these questions. The act of researching the answers to these questions will tell you a lot more about GDP in India than any column praising or defending these numbers will.

Why ten questions? Nice round number, and a good place for me to stop, that’s all. I hope you come up with even more questions!

Here goes:

  1. What is the “second advance estimate”? And while you’re at it, what is the first advanced estimate?
  2. And if you are a glutton for punishment, what are the first, second and third revised estimates? When are they typically released?
  3. When have they been released this year? Why the difference?
  4. Has the data for previous years been revised? Why? How? What does that tell you about how to interpret the current quarter’s data?
  5. Take a look at the first table on pp. 7 of the PDF. What is up with manufacturing? This is an oh-so-important question. Think about it everyday if you are a student of macroeconomics and development in India. Every single day.
  6. Take a look at Private Final Consumption Expenditure (PFCE) (Tables 6A and 8A). What is up with consumption? This is also an oh-so-important question. Also think about it everyday. Every single day.
  7. What, in your opinion, are the drivers of growth right now? Whatever your answer, why? (Hint: what do you think about capital expenditure in India today? How do you think about it at the central government level and at the level of the states?)
  8. Where, in your opinion, will interest rates be going this year? How will this impact your assessment of GDP growth estimates this year? Why?
  9. What is your assessment of this year’s monsoon? Why do you think this question matters in the context of India’s GDP, especially this year?
  10. What is your assessment of where oil prices are going to go this year? How do you think the answer to this question will impact India’s GDP, especially this year?

How should you go about answering these questions?

  1. Take a printout of the press note, and annotate it to your heart’s content. Come up with questions about your annotations, and don’t worry about how many questions you come up with. The more the merrier!
  2. Go ask your batchmates (and also your seniors) about their answers to these questions. Don’t worry (yet) about whether you agree with the answers you get – listen, imbibe and check whatever sources you get to learn about.
  3. Once you do this, go ask your professor(s) about their answers to some of these questions. Feel free to ask them about what you should be reading to learn more.
  4. Reach out to people on Twitter or LinkedIn who you think might be able to answer some of your questions. Don’t be afraid of asking pretty much whoever you like, but do not think you are entitled to a response. You aren’t – but if your question is a well-thought out one, not only will you likely get a response, but it will most likely be a considered, detailed response. People are helpful that way, especially if they see that you’re making a serious effort to learn. The emphasis is on the word serious!
  5. Write. Once you do all of this, pen down your learnings, and the questions that still remain. Share it with the world. Make sure you do all this before 5.30 pm on the 31st of May, 2023. If you want to ask why, go reread the first sentence of today’s blogpost.

See you then!

Chart of the Day: Incentives Matter

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https://www.economist.com/graphic-detail/2022/09/29/a-study-of-lights-at-night-suggests-dictators-lie-about-economic-growth

Incentives matter:

The explanation is probably simple: opportunity and motive. Part of what makes dictatorships dictatorships is that questioning the official line is dangerous. At the same time, autocratic regimes have a strong incentive to report healthy growth: its absence may be taken as a sign of incompetence or weakness, which dictators can ill afford.
Autocrats’ subordinates face similar incentives. In a related study Jeremy Wallace, a researcher, found misreporting by Chinese provinces, too. As he notes, a leaked American diplomatic cable from 2007 revealed the view of Li Keqiang, the prime minister, then a provincial party secretary. He had said, with a smile, that gdp figures were “for reference only”: he relied instead on proxies, such as electricity use.

https://www.economist.com/graphic-detail/2022/09/29/a-study-of-lights-at-night-suggests-dictators-lie-about-economic-growth

Incentives matter is the very first slide in my presentation on Principles of Economics (as it should be). But there’s always more to learn and think about where this deceptively simple idea is concerned, and this chart and the accompanying article from the Economist are a great example about the deceptive bit.

Once you understand the incentives associated with a particular entity in a particular context, you should then learn the art of being appropriately sceptical about their statements. One shouldn’t assume that they’re lying, nor should one assume that they’re telling the truth – one should understand what the incentives are of the person reporting a particular claim, and adjust one’s expectations accordingly.

Incentives matter, and understanding a person’s incentives matters at least as much, if not more.

Like their leaders, citizens in dictatorships often assume they are being lied to. Outsiders should be similarly sceptical.

https://www.economist.com/graphic-detail/2022/09/29/a-study-of-lights-at-night-suggests-dictators-lie-about-economic-growth

I’d go one step further, and recommend that while reading, listening or viewing anything, one should keep the incentive of the creator in mind. It makes for a more interesting experience while consuming said content, and you are, at the margin, less likely to be taken for a ride.

Imports and GDP: This Stuff Matters!

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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

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“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

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(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

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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

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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

Ashish1 Comment

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[↩]