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.

 

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10 links to awesome sauce sources about GDP

  1. For a truly fun, positively mind boggling application of GDP, try the Gapminder website. It is a LOT of fun, and a truly useful way to make sense of the world around you.
  2. The Marginal Revolution University is the place to go to for engaging videos on hajjar topics in economics. Over time, they’ve built up a truly useful repository, and you really should check it out. We’ll be giving multiple links over time, but to begin with, try this video about GDP.
  3. Need data on GDP for various countries but not sure about where to get it? The World Bank World Development Indicators are your friend in need. Click here to visit the page for GDP in particular, and if you are a data nerd, you’ll have a lot of fun.
  4. Another source would be the IMF database, or the World Economic Outlook database.
  5. If you want in depth data about Indian GDP in particular, you should visit the RBI database on the Indian economy. It won’t win any awards for user-friendly design, but it gets the job done.
  6. If reading really isn’t your thing, you might want to listen to an interview of Diane Coyle, by Russ Roberts on his podcast, EconTalk. Simply download the mp3 file, and listen at your leisure.
  7. If you really want to learn about GDP and India, there are two must read PDF’s. The bad news is, there is no TL;DR and they’re really long, and not exactly entertaining. Still, if you want to think through all of the issues that are involved in counting out India’s GDP, then reading the Sources and Methods and Changes in Methodology and Data Sources in the New Series of National Accounts are must reads. Not page turners, you understand, but must reads.
  8. If you haven’t had your fill of thrillers based on GDP, take a look at the guidelines set up for countries who want to report their national accounts.
  9. If reading long boring documents, published by the Indian government or otherwise, is not your thing, then you might want to read a book written by  Diane Coyle. It’s called  “GDP: A Brief but Affectionate History” and it really is worth your while.
  10. If you’ve stuck around till now (we hereby declare you an honorary nerd) you deserve to be rewarded. The Angus Maddison database, ladies and gentlemen, if ye olde GDP be your thing.

 

Deciphering India’s GDP

What is India’s GDP and why should I care?

As we discussed in our previous post, the reason you should care about India’s GDP is because it is a good way to get a quick, one-number estimate about how “well” India is doing. This post is about answering the first part of the question posed above: what is India’s GDP?

First things first: that’s an incorrect question. What people really mean when they ask that question is: what is India’s GDP growth rate. That last phrase is often missing, which is what can (and often does) cause confusion.

GDP is what you, I and literally millions of Indians produced in one time period. GDP growth rate is how much more did we produce this year, relative to last year. When we say that the Indian economy grew at 7.5% last year, we mean we produced 7.5% more of goods and services this year when compared to last year.

Why is that a good thing? Well, producing more stuff usually means selling more stuff. Selling more stuff means more of us earned more this year compared to last year – and since when was that a bad thing, huh?

Also, producing more stuff implies requiring more people to produce said stuff, which means (probably) more people were employed this year compared to last year. And that’s also a good thing, right?

So: a higher number for our GDP growth rate means richer Indians, and more jobs all round. That’s why economists, policy makers and the media watch the GDP number so closely – its because this number tells us whether India is getting richer over time, and gives us a rough idea about whether more Indians are with jobs this year compared to the previous year.

Where should you go to check out India’s GDP growth rate? Well, there are many sources out there, but the safest is go to the source: the Ministry of Statistics and Programme Implementation. (Fun challenge: spend the next five minutes coming up with a name that bores you more than this one did)

On the home page, under a column titled “Latest News”, look for a banner heading that runs along the lines of “Provisional Estimates of Annual/Quarterly Estimates of GDP”. Clicking on that link opens up a PDF, in which the growth rates of GDP will be given. 2016-06-20 (1).png

Be careful! You should look for the GDP growth rates in constant prices, not current ones. In a later post, we’ll explain what the difference between the two is, but for now, do note that its constant prices that matter, not current.

As you can see in the table to the right, we grew at about 7.6% for the period 1st April to 31st March 2016.

And that’s a (very!) quick introduction to GDP. We’ve hopefully managed to convince you of the need to know a country’s GDP growth rate, and where to find it in India’s case. In posts to come, we’ll talk much more about GDP. For now, we’ll do a follow-up post on our Facebook page about links relevant to this topic that you might want to check out. Let us know what you think by dropping us a note in the comments below!

GDP 101

True story:

This actually happened to an ex-colleague of mine. In his final year as an MBA student at MDI (Gurgaon), he had been elected as the placement coordinator. He and his team were doing well, and had sewn up quite an impressive list of companies that had agreed to visit their campus. All was cool and hunky dory, and they had even managed to book every single slot for placement week by September…

…10, 2001.

They got ditched more in the next month than I did in two years of asking girls out in college.

Remember, this was September. Companies were looking to hire students who would join by June 2002. But everybody just “knew” that the economy was going into a tailspin for at least a year, and that was that. No jobs.

It’s a question that bothered all of us when we were in college, and will no doubt be keeping students who’ve just joined college up at night: what will the economy look like when placement season starts?

And that, ladies and gentlemen, is one reason learning about GDP and its growth rate makes sense. It gives us a sense of where we, as an economy, are now, and where we are likely to be in the near future.

Outside of the specific trends in the sector that we are interested in, we are also very, very interested in how the “overall” economy is doing. It’s like a doctor taking a patient’s temperature. It’s a convenient way of quickly assessing the overall health of the patient.

Similarly, while there are literally hundreds of other ways of gauging what is up with the Indian economy, one quick, near-universal method is to take a look at what the GDP growth rate has been over the past four quarters or so.

High (say about 7% or so in India’s case) and steady (around 7% or so for the last four quarters running) is good. If either of those conditions aren’t met – that is to say, it’s either low now, or has been low in the recent past – you have cause for concern. If both of those conditions aren’t met, and you are the placement coordinator for your college, say hello to insomnia.

People who’re looking to launch a factory a couple of years from now, a company that has a half-built hotel that is going to come online six months from now, a person contemplating quitting her job and looking for a new one – anybody who’s thinking of their (economic) future would do well to take a look at what the economic thermometer called GDP growth rate is up to.

In the next post, we’ll take a look at how and where India’s GDP is reported, and how to go about making sense of it. We’ll also do a follow-up post on our Facebook page, where we’ll post additional links, videos and podcasts that would be good follow-ups.

Get a conversation started – do let us know what you think!