Massaging GDP (Gross Domestic Product) Figures (ENGLISH, Macedonian subtitles)
Channel: Sam Vaknin's Musings
Date: 2015-10-17

The formula to calculate GDP (Gross Domestic Product) is this:

 

GDP (Gross Domestic Product) = Consumption + investment + government expenditure + net exports (exports minus imports) =

 

Wages + rents + interest + profits + non-income charges + net foreign factor income earned

 

But the GDP figure is vulnerable to "creative accounting":

 

1. The weight of certain items, sectors, or activities is reduced or increased in order to influence GDP components, such as industrial production. Developing countries often alter the way critical components of GDP like industrial production are tallied.

 

2. Goods in inventory are included in GDP although not yet sold. Thus, rising inventories, a telltale sign of economic ill-health, actually increases the GDP!

 

3. If goods produced are financed with credits and loans, GDP will be artificially HIGH (inflated).

 

4. In some countries, PLANS and INTENTIONS to invest are counted, recorded, and booked as actual investments. This practice is frowned upon (and landed quite a few corporate managers in the gaol), but is still widespread in the shoddier and shadier corners of the globe.

 

5. GDP figures should be adjusted for inflation (real GDP as opposed to nominal GDP). To achieve that, the calculation of the GDP deflator is critical. But the GDP deflator is a highly subjective figure, prone, in developing countries, to reflecting the government's political needs and predilections.

 

6. What currency exchange rates were used? By selecting the right "points in time", GDP figures can go up and down by up to 2%!

 

7. Healthcare expenditures, agricultural subsidies, government aid to catastrophe-stricken areas form a part of the GDP. Thus, for instance, by increasing healthcare costs, the government can manipulate GDP figures.

 

8. Net exports in many developing countries are negative (in other words, they maintain a trade deficit). How can the GDP grow at all in these places? Even if consumption and investment are strongly up - government expenditures are usually down (at the behest of multilateral financial institutions) and net exports are down. It is not possible for GDP to grow vigorously in a country with a sizable and ballooning trade deficit.

 

9. The projections of most international, objective analysts and international economic organizations usually tend to converge on a GDP growth figure that is often lower than the government's but in line with the long-term trend. These figures are far better indicators of the true state of the economy. Statistics Bureaus in developing countries are often under the government's thumb and run by political appointees.