In January of 2015, India announced it was revising the base year used to calculate GDP. Results for the 2013-14 financial year leapt from 4.7 percent GDP growth to 6.9 percent, and Prime Minister Narendra Modi has since publically declared India the fastest growing economy in the world.
Unfortunately economists don’t believe it, and Reuters has reported the Reserve Bank of India, like many other analysts, is looking at different indicators to gauge the health of the country’s economy before new figures are announced at the end of February. While GDP is often used as the single most important statistic in measuring economic performance and wellbeing, it’s quite limited.
While the shadow economy is notoriously difficult to calculate, including it in GDP calculations is becoming more common
GDP can either be a sum of all the money spent each year, a sum of all the money earned each year, or a sum of all the value added each year. Theoretically these should all be the same figure, but in practice this isn’t the case. The US releases both its GDP and Gross Domestic Income (GDI) figures showing this. There isn’t a standard way for countries to calculate their GDP, so methods vary. Figures are also often revised multiple times as more information becomes available. Economies are huge and unwieldy, so mistakes are common.
Japan is an example in how hard GDP is to accurately calculate. In November last year it released its third quarter economic data, showing a 0.8 percent GDP shrinkage on an annualised basis and a second consecutive quarter of contraction. Three weeks later revised data came out, showing the economy had in fact grown at an annual pace of one percent.
Japan has a tough time calculating GDP. It tops the list of The Atlas of Economic Complexity, thanks to its large and varied number of imports, exports and manufacturing industries. As such, their first drafts of data are notoriously off.
According to an investigation conducted by Bloomberg, Japan’s central bank forecasts are the most inaccurate of the Group of Seven banks. In the case of its most recent calculation figures were released before some data – such as changes in corporate investment and inventories – became fully available. This revision was particularly big, but not unexpected.
GDP can also be massaged to produce the desired result. Ever since the World Bank questioned the reliability of China’s data in the 1990s there has been plenty of speculation on the accuracy of its reported GDP.
Research has shown China’s GDP data was overstated by more than five percent through the 1998-99 Asian financial crisis, and premier Premier Li Keqiang is on record as saying he is sceptical of the country’s numbers.
In 2013 Nigeria was in a similar situation to India and set a new baseline year.
Economists compare growth in different sectors to a baseline year, and calculate a total based off each sector’s importance to the economy. Nigeria’s baseline year was 1990, weighing sectors like telecommunications low and ignoring new industries. By re-establishing the baseline year to 2010, the economy jumped 89 percent making it South Africa’s largest and 24th in the world. Ghana did the same thing in 2010; changing its base year to 2008 showed GDP 60 percent higher than previously thought.
Even if economists were able to get more complete data, GDP still has limitations. It’s hard to measure the ‘underground economy’ of cash and illegal transactions. Italy estimated its shadow economy and added it to its figures in 1987, boosting GDP by 18 percent and leapfrogging Britain to then become the fourth largest western economy. In 2014 it announced it will be including drug trafficking, prostitution and smuggling as well.
This is in line with regulations laid out by the EU European System of Accounts rules designed to make the GDPs of member states more comparable. While the shadow economy is notoriously difficult to calculate, including it in GDP calculations is becoming more common. Figures from 2014 showed drugs and prostitution added £10bn to the UK’s economy.
GDP is also not a particularly good measure for quality of life. As it doesn’t consider what money is spent on, GDP will increase whether a government is building schools or landmines.
Because of these shortfalls, different ways of measuring the economic progress of countries are becoming more common. The Genuine Progress Indicator (GPI) is one, and takes into account factors such as the social impact and environmental costs. It’s been shown GDP can increase while GPI stays the same, thanks to factors like division of wealth.
Another figure is the Social Progress Index (SPI), calculated by the Social Progress Imperative. Designed to compliment GDP, SPI measures whether countries are meeting basic human needs, the foundations of wellbeing and opportunity factors. Their report Social Progress Index 2015 showed while some countries posted high GDP, it did not necessarily translate to comparable SPI Growth.
Saudi Arabia was fifth in world in terms of GDP per capita, but ranked 69th on SPI thanks to weak scores across most categories, in particular on personal rights. Costa Rica was the biggest over performer on social progress compared to its GDP. While being ranked 59th on GDP per capita, it was 28th in SPI.
However, this doesn’t mean social progress and GDP aren’t completely separate; Norway was number one in SPI and number two in terms of GDP per capita.
While not a completely useless figure, GDP is given more credit than it’s due. More important to the people of India might be the many areas it falls short in the Social Progress Index, such as health, access to information and communication and air pollution.