Alan Bollard: Could we be better off than we think?
Speech by Dr Alan Bollard, Governor of the Reserve Bank of New Zealand, and Ms Rochelle
Barrow, to the Trans-Tasman Business Circle, Auckland, 17 February 2012.
* * *
The authors are grateful for the helpful comments and suggestions received from Michael Reddell, Phil Briggs,
Bernard Hodgetts, Yuong Ha and Tim Ng. Any remaining errors are the responsibility of the authors.
Executive Summary
Quality macroeconomic statistics help us understand developments in our economy, and
especially about the way economic activity and related measures are changing over time.
Time series data play a critical role for us in monetary policy. However, macroeconomic
statistics also play another important role; they are used by analysts and the media to judge
how well New Zealand is doing relative to other countries, and they also play a part in how
positive we feel about ourselves.
International comparisons of macroeconomic statistics can be fraught with difficulties.
Differing definitions, measurement, currencies and price levels are just some of the factors
that can cloud the picture.
Our view is that in New Zealand, some conservative statistical interpretations and particular
characteristics of our economy have resulted in the understatement of New Zealand's
economic performance. In international league tables New Zealand is in some ways better
off than is often thought. Though better, more comparable statistics, do not make any
individual New Zealanders any better off in an absolute sense, they do affect the
interpretation of New Zealand's relative economic performance over the decades and they
impact individual decisions.
In this paper we discuss some of these statistical issues and provide some rough estimates
of their possible impact on GDP per capita - which is the most widely quoted, if not always
the most useful, indicator of an economy's performance. Our list is not exhaustive, but
surprisingly all of the treatments covered result in an underestimation of New Zealand's
GDP. Could New Zealand's GDP be higher relative to other OECD countries? Could it be
around 10 percent higher relative to Australia? And what might that mean for thinking about
the New Zealand economy and its changing fortunes?
As this paper outlines, Statistics New Zealand, like other countries including Australia,
regularly changes its measurements. A number of examples of change Statistics NZ has
made and the difference to the resulting statistics is provided in my paper. Statistics New
Zealand was given additional funding in last year's budget to undertake a major multi-year
change programme. This enables it to accelerate its ability to change statistics to keep up
with the evolving requirements.
Why statistics matter
At a central bank, macroeconomic data and statistics play a crucial role in policy
deliberations. Our analysts consume a vast quantity of data looking for insights into the
performance of New Zealand's economy and financial sector. These analysts become
familiar with data sources, their strengths and weaknesses, and the methodologies employed
to produce statistics. Knowing how a statistic is compiled is an essential part of ensuring that
it is interpreted correctly.
Of particular interest to the Reserve Bank are macroeconomic statistics. They summarise a
significant volume of detailed and sophisticated interactions that occur in an economy, often
in one headline number like gross domestic product (GDP), the unemployment rate, and the
consumers price index (CPI).
In New Zealand, we have adequate, but certainly improvable, official and private
macroeconomic statistics and indicators for the purposes of monetary policy formulation -
where the focus is mostly on cyclical developments; the shorter-term swings in how
economic activity is performing.
However, statistics on economic performance also play a role in shaping national
conversations about how our economy has performed over time, and especially relative to
economic performance in other advanced economies. As far as possible, policymakers and
private analysts need good comparable national and international data to enable those
comparisons, and the consequent policy recommendations and debate to be as well-founded
as possible.
Even if there are weaknesses in the data, analysts and journalists will use whatever is
available. Even when caveats are given that information may be overlooked. In recent
decades, a large emphasis has been placed on developing internationally comparable
statistics - not just so that the same things are measured the same way in different
countries, but also to enable useful cross-country comparisons of levels of economic activity,
in the face of things like big swings in market exchange rates. Organisations like the UN and
IMF produce conceptual frameworks, like the system of national accounts (SNA), to aid
statisticians when producing macroeconomic statistics. However, while these frameworks
provide guidance, they are not completely formulaic.
How a country implements framework recommendations depends on a number of factors,
including the nature of their economy, what data sources are available, and the level of
resource they have. Given how complex and large some of these frameworks are, and that
they are often updated, countries may also be at different stages of adopting the latest
version of the framework.
There are many different ways of estimating statistics and the measurement decisions taken
by statisticians make a difference. Different data and methods can deliver different results.
We believe that some of the statistical methods used to measure the New Zealand economy
currently result in an understatement of New Zealand's economic performance when
compared to other countries.
This paper discusses some of these statistical methods and attempts to estimate the
possible impact on New Zealand's GDP. This paper is not intended as a criticism of Statistics
NZ with its statistical challenges and limited resources. Its purpose is to raise awareness of
these factors, increase the priority placed on improving the quality of New Zealand's
macroeconomic statistics and to make people aware of the issues regarding international
comparisons. In some cases, plans are already in place to remedy statistical weaknesses.
What is required for successful comparisons?
Most people when assessing whether the New Zealand economy is performing well will ask,
relative to what? One way of posing the question is to ask how the economy is performing
relative to its own past history. For those sorts of comparisons, consistently compiled (or
revised) data through time is important. Another important way of posing the question is to
look at how New Zealand is doing relative to other advanced economies. In New Zealand we
often compare ourselves with Australia, our nearest neighbour, and a labour market to which
New Zealanders have quite ready access.
However, comparing statistics can be fraught with difficulties unless certain conditions are
met1:
The definition is the same; conceptually are the statistics covering the same things.

 The measurement is the same or similar; are the methods used to estimate
consistent.
 Appropriate adjustment is made for the influence of exchange rates, price levels and
consumption tastes across countries.
When these conditions are not met, those performing the comparison may attempt to
"standardise" the data themselves. The nature of these adjustments and their levels of
transparency can add further confusion to international comparisons2. For example, New
Zealand does not currently produce all of the key macroeconomic statistics that most other
advanced economies do3. As a result organisations such as the OECD sometimes attempt to
estimate these in order to include New Zealand in international comparisons.
1. Definitions
Over the last 30 years there has been a large push towards the development of integrated
international conceptual frameworks for producing statistics to aid international comparisons.
These frameworks help to ensure the quality and integrity of statistics by providing a
theoretical background to what is being measured and definitions. For example the SNA
mentioned earlier defines what is included and what is excluded from GDP. There is no
entirely right or wrong answer as to what should be included in GDP - what really matters is
consistent transparent treatment, including where possible consistency across countries.
The frameworks are reviewed and updated periodically as the economy evolves. This can
result in new definitions of concepts such as GDP, investment and consumption, often
involving a significant amount of work in backdating data to ensure consistency through time.
2. Measurement
Statistical frameworks are often accompanied by compilation guides, which guide
statisticians in how best to measure the theoretical concepts. They often present a best
practice method, and if data sources and resources are not available to implement that
method, other less desirable measurement options are presented. The measurement
decisions made by statisticians can have a significant impact on the end result.
3. Currency unit and price level
Statistics must be expressed in a common unit for comparison. A simple way to achieve this
is to convert individual currencies to a base currency using exchange rates. However, this
type of conversion can distort comparisons because of the impact of such things as
shortterm currency fluctuations on exchange rates. This is why a lot of international comparisons
are now performed using purchasing power parity (PPP). PPP conversions are currency
conversion rates that both convert to a common currency and equalise the purchasing power
of different currencies.
The income gaps between countries are typically smaller on a PPP basis than they are if
simply converted into a common currency as over time, prices of tradable goods tend to be
much the same across countries, but the real cost of labour-intensive services tends to be
much lower in poor countries than in rich ones.
However, PPP adjustments have their limitations. Probably the most significant is the
representativeness of the products used in the calculation. PPP comparisons are most
accurate in comparing incomes or consumption in pairs of very similar countries, where
similar products and consumption tastes exist. The more the differences between countries
the more important it is to do the corrections, but the more approximate the comparisons are.
Thoughtful observers typically caution against putting much weight on differences in PPP
income measures of less than perhaps 5-10 percent, even if all the countries recorded their
GDP data in exactly the same way.
What is the impact of statistical treatments on our GDP?
This next section explores in more detail some of the differences in measurement in New
Zealand relative to the rest of the world, in particular Australia. We attempt to quantify the
impact of these measurement differences on estimates of the level of New Zealand's GDP.
For the 2010 year, net national income per capita PPP league tables produced by the OECD
currently have Australia 35 percent higher than New Zealand.
Statisticians around the world use the SNA to guide measurement of their economies4. The
SNA is a comprehensive and systematic set of accounts, similar to a business accounting
framework, but for a nation. The framework captures a considerable amount of detail about
how an economy works and how economic agents behave.
As noted earlier, statisticians can chose to implement the SNA in a variety of ways, bearing
in mind the constraints (both on data and resources) that they face. It is these constraints
and decisions taken which need to be recognised and understood when comparing
macroeconomic statistics across countries.
1. Measuring the unobserved economy
In order to produce a comprehensive consistent estimate of GDP, all economic production
(defined by the SNA production boundary) in an economy should be measured, whether that
production is "observable" or not. The unobserved, or not directly measurable, economy
includes some activities that are illegal, underground (cash jobs), or undertaken by
households for their final use (growing their own vegetables).
While the inclusion of estimates for illegal activities such as drug dealing are not common,
almost all countries that prepare GDP statistics include estimates for some other unobserved
activity. A 2008 UN report suggests that for most countries, tax-based measures of income,
like those used in New Zealand, tend to understate actual levels of income. This tends to
affect initial estimates of the income measure of GDP; and in most countries these are
adjusted up.
According to the report and a survey of country practices, of the 45 countries surveyed, New
Zealand and Japan were the only countries that made no explicit estimates of unobserved
activities in the estimation of GDP5.
The importance of the unobserved economy is of course quite different across countries, so
under reporting will vary for this reason. However, the issue for international comparison is
that New Zealand does not currently include any estimate of this production in its GDP.
Taking Australia as a benchmark, where explicit estimates are not made for illegal activity,
but are made for the underground economy and household backyard production, we believe
GDP in New Zealand could be underestimated by 2 percent6. Given it is the household
sector which is mainly engaged in this activity, household income and therefore saving could
also be underreported.
Of course, it is worth noting that most estimates are that the underground economy in New
Zealand is somewhat small. As with other countries, our comprehensive GST system
reduces opportunities for tax avoidance, as does our relatively comprehensive broad-based
income tax system. We encourage further research in this area.
2. Measuring the value of financial services
Banks and other financial intermediaries earn income not only through explicit fees and
charges but also on the margin between the interest they pay to depositors and the interest
they charge borrowers. Because of the margin, the financial services that we consume do
not necessarily have an explicit price, unlike most goods and services in an economy. For
the purposes of the SNA the services provided, through the use of the margin, are known as
Financial Intermediation Services Indirectly Measured or FISIM.
Calculating the value of a service without a price is complex7. However, the SNA provides
guidelines on how this can be achieved through the use of a relevant reference rate. In
addition to how the value of FISIM is calculated, what is important for GDP estimates is how
those financial services are allocated to their end users.
Within the SNA framework, goods and services consumed by businesses in order to produce
other goods and services, are treated as intermediate consumption (or an expense) and
subtracted from GDP. However, the use of goods and services by household, government
and the foreign sector are treated as final demand and these add to GDP.
Most countries treat FISIM in a way that increases GDP by allocating the service to the
sector that uses or consumes it8. In New Zealand all financial services are assumed to be
used by businesses in the production of other goods and services.
There is considerable international debate on the measurement of FISIM as a result of
volatility during the Global Financial Crisis9. However, it is the allocation method which
5
UN (2008).
6
In Australia a 1.3 percent adjustment to GDP is made for the underground economy and a 2.0 percent
adjustment is made to household income.
7
For more information see IMF et al (2008).
8
The method used in New Zealand is the SNA 1968 recommendation, which is presented as an option in SNA
1993, when data sources available do not allow the best practice alternative. The method is to allocate all of
FISIM to a notional industry in the production measure of GDP (often referred to as the bank service charge).
This ignores any consumption of services by households, government and foreigners. Best practice is to
estimate each industry's expenditure on financial services and subtract it from the value added of that industry
(rather than simply off total GDP). Then household, government and foreign consumption of financial services
is estimated and this is added to final consumption estimates. The impact of this allocation method is an
increase in GDP, because less is subtracted from the production based measure of GDP and more is added
to the expenditure based measure of GDP.
impacts negatively on New Zealand in international comparisons. We estimate the impact of
this at approximately 2 percent of GDP, although we acknowledge there are other estimates.
The failure to allocate some of FISIM to the household sector has resulted in a growing
understatement of income measures over the last 20 years, a period when the household
sector has borrowed more, and hence consumed more financial services.
Box - Case study - Household saving rate10
Measurement is difficult in times of change. In the early 2000s there was a rapid increase in
the number of New Zealand households using trusts to manage household finances. The
use of trusts impacted quite significantly on the data sources used to estimate New
Zealand's household saving rate.
In the mid 2000s New Zealand's household saving rate was considered an outlier relative to
other countries. At the time, unlike other countries, New Zealand did not produce other
sectoral saving estimates (other than government) that could be used to validate the
household saving rate either.
Due to the concerns raised about the quality of the estimates and the important policy
decisions being made at the time, Statistics NZ reviewed the measurement of the
household saving rate and in 2010 a number of methodological improvements were made.
In 2005 the household saving rate was first estimated at -15 percent. The current estimate
for 2005 is now -6 percent.
3. Other Services
The increasing importance of service industries could also be influencing our GDP estimates.
In particular, government administration, health and education services are particularly
difficult to measure. Of course these measurement difficulties are experienced by many
countries. A number of different estimation techniques are used overseas.
In the absence of good output measures in New Zealand, the output of some service
industries, particularly in the government sector where prices may not exist, is assumed to be
directly proportional to industry inputs. This measurement assumes no productivity growth in
the industry, and will likely result in an understatement of GDP and productivity.
This will have had a reducing impact on GDP levels, though we cannot estimate by exactly
how much.
4. Measuring the value provided by residential buildings
In an economy, residential buildings provide services to those who inhabit them and are
included in the calculation of a country's GDP. An imputed rental derived from occupying
your home is included in the calculation so that GDP is not affected by home ownership rates
over time, or across countries.
The contribution of residential building, whether they are occupied by the owner or rented, to
GDP is significant. In New Zealand and Australia different methods are used to estimate this
contribution. The most significant difference for comparability is that in Australia the output of
residential buildings is quality adjusted; that is the measurement method used allows for an
increase in the quality of properties over time11. The types of quality improvement allowed for
includes size and location. In New Zealand the measurement method assumes no quality
improvement. Output purely reflects the number of properties. We note there are some
complex issues around the use of constant or current prices here.
The lack of quality adjustment leads to an understatement of GDP. If we assume a similar
growth path to Australia for New Zealand, we estimate the approximate ballpark for GDP
could be 1.5 percent higher.
5. New standards for measuring the economy
Statistical frameworks, like the SNA, must be updated and revised to ensure that the
statistics produced remain relevant and fit for use by policy and decision makers. However,
with change comes a comparison issue, as countries progressively move to new standards.
The international standard for SNA was revised in 2008 and a number of conceptual
changes were introduced. One of these changes was the move to capitalise research and
development, which had previously been treated as an expense. This change means that
research and development activity now counts as investment and adds to GDP, rather than
subtracts from it.
In 2009 Australia implemented a number of new standards and classifications into its
production of macroeconomic statistics, including the 2008 version of SNA. In this, Australia
made changes earlier than any other country did. These changes resulted in significant
revisions to national accounts and balance of payments statistics. The table below quantifies
the revisions made to nominal GDP estimates. In the year ended June 2008 GDP estimated
using the new version of SNA (and making adjustments to employment income) was
4.4 percent, or $50b AUD higher, than the older version.
The revision upwards of Australian GDP results in an even wider gap between New Zealand
and Australia GDP per capita measures. However, New Zealand and Australia, while still
producing GDP estimates, are now producing these statistics on a different conceptual basis.
They are no longer directly comparable.
Statistics NZ plan to introduce SNA 2008 in 2013-14. This is similar timing to other countries
around the world. It is difficult to estimate the impact that new international standards will
have on New Zealand's national accounts and GDP. We estimate approximately a 3 percent
increase in GDP.
6. Reconciling different measures of GDP
A country's GDP can be estimated three ways, using the production method, the income
method, or the expenditure method. Conceptually the three measures provide equal results.
However, in practice, due to differing data sources and imperfect methodologies, this is
rarely the case.
Statisticians use a process called supply and use balancing to make the three measures
equal. This essentially forces all goods and services produced in an economy to be used by
an economic agent. In New Zealand supply and use balancing is performed annually and
only in nominal terms, or current prices. These estimates are released with approximately a
two year lag.
Many analysts are more interested in timelier, more frequent (quarterly) and price adjusted
(real) GDP estimates. However, for this a trade-off is made. Timely, quarterly estimates of
real GDP are derived using incomplete data sources and in New Zealand, the two measures
of GDP produced - production and expenditure - are not forced to equal. Given that current
price GDP estimates are balanced, the discrepancy in real GDP estimates is the result of an
error in either estimating volume growth (real GDP) or prices.
In recent years the quarterly measures of real GDP have presented quite different views and
diverging on the New Zealand economy. The headline measure preferred by Statistics NZ is
the production measure, primarily because it exhibits less volatility than the expenditure
measure on a quarterly basis. This measure implies that the recession in New Zealand was
deeper and more prolonged than the expenditure measure.
However, since 2007 a relatively large gap between annual real GDP estimates has opened
up. Production GDP estimates have undershot expenditure GDP estimates for five years
running. When expressed in 1995/96 dollars the gap in the March 2011 year is $5.9b or
4.3 percent of GDP12.
Given that the discrepancy will likely be revised away in future years, which is most reliable
measure of New Zealand's economic growth? Will production based estimates be revised
upwards or expenditure based estimates be revised downwards? Will these revisions have
implications for the level of New Zealand's GDP?
In Australia, all three GDP measures are available on a quarterly basis, and instead of
elevating one measure over another, the quarterly GDP movement is calculated by
averaging the movements of the three measures. This by nature decreases volatility in the
headline GDP estimate. Using the average measure of Australian GDP, Australia avoided a
technical recession, apparently the only OECD country to do so. However, based on the
production measure of GDP, the headline measure in New Zealand, Australia experienced a
technical recession in the March 2009 quarter.
Alternative national accounts series
Much of this discussion has focused on GDP comparisons, since GDP is the most
widelycited national accounts measure of aggregate economic performance. But there is a wide
variety of other national accounts measures. For example, Gross National Income (GNI)
adjusts the value of output in New Zealand for the income generated here that accrues to
foreigners, and income generated abroad accruing to New Zealanders. For most advanced
economies the difference is not large, but in New Zealand GNI is about 7 per cent lower than
GDP.
In addition, GDP measures the value-added in New Zealand. However, in drawing
crosscountry comparisons it might not be the value-added here that matters, but the level of
household consumption (whether of things purchased directly by households, or services
provided to households directly by the government).
In a similar vein, comparisons of income per head can usefully take account of how much
depreciation takes place each year: GDP and GNI are gross measures, while Net DP and
NNI adjust for depreciation, to give a sense of how much of the economy's production is left
available for consumption. The difference affects New Zealand and Australia comparisons
quite materially: Australian GDP per capita is significantly higher than that in New Zealand,
no matter what adjustments one does, but because the Australian resources sector is very
capital intensive, much of the income is needed simply to cover the depreciation on the
capital stock. In purchasing power parity terms, even with current national accounts
measurement, actual individual consumption per capita is only about 20 percent higher in
Australia than in New Zealand. This incidentally supports our view that New Zealand's GDP
is currently being understated.
It is also worth noting that common living standard comparisons use GDP or GNI per head of
population. Those comparisons are useful for some purposes, but they do not shed much
light on the productivity performance of the economy. For example, although New Zealand's
GDP per capita lags much of the OECD, that performance is achieved only with relatively
high working hours per capita.
These differences do not matter very much from year to year but need to be borne in mind in
assessing the overall performance of the economy and resources available for consumption,
both now and in the future.
Alternative measures of well being
GDP per capita (and the other associated national accounts measures) has often been
criticised as an incomplete statistic of economic well being. Over recent years a number of
new indicators have been developed which usually supplement GDP estimates with other
characteristics of an economy, such as the level of educational attainment or long term
unemployment rate. The OECD better life indicator is an example, and New Zealand rates
very highly on this comparison. (The UN's Human Development Index, another attempt at a
composite measure of living standards, also scores New Zealand consistently highly,
although still a little lower than either Australia or the United States).
Based on 11 topics the OECD has identified as essential, in the areas of material living
conditions and quality of life, New Zealand ranks fourth in the OECD13. The graph below,
sourced from The Economist, illustrates the point well. New Zealand appears as an outlier.
What does this mean for international comparisons?
International comparison of macroeconomic statistics is fraught with difficulties. Differing
methodologies and data sources means that, in some cases, statistics are not directly
comparable, despite data being labelled the same. Analysts and policymakers are wise not
to make much of smallish differences - and short-term changes in differences in incomes
across countries, which can be substantially affected by the different shocks each country
faces in the short-term.
This paper has given some insight into the impact measurement can have on
macroeconomic statistics. We estimate that measurement of parts of the unobserved
economy could add 2 percent to New Zealand's GDP and the allocation of FISIM another
2 percent. Quality adjusting for residential buildings in New Zealand could add a further
1.5 percent. Improving the estimation of value-added by service industries could also
improve New Zealand's GDP. While more difficult to estimate due to its complex nature, the
move to SNA2008 could add an additional 3 percent to GDP (and reduce the gap to Australia
to that extent).
It is almost certain that consistent measurement conventions used in New Zealand and
Australia would narrow the reported income gap with Australia (differences would be smaller
with some other OECD countries). We cannot be precise about this, but the (mainly
Australian) conventions noted above could add something very approximately in the broad
ball-park of 10 percent to New Zealand's official GDP. These are not definitive, we accept
there are counter-arguments to these numbers.
But what does this mean for New Zealanders? Of course, revising GDP does not lift the
actual incomes (wages and salaries) and purchasing power of individual New Zealanders,
and does not raise the tax base for the government either. We cannot make ourselves better
off directly just by measuring things differently. And the steady outflow of New Zealanders to
live in Australia - one of the largest relative outflows of a country's citizens seen anywhere in
the OECD - will not principally be because of GDP statistics, but because of individuals'
actual and perceived sense of the opportunities for themselves and their families.
But reducing measurement differences is important for many other reasons:
 Households may not make optimal decisions regarding employment, training,
migration, saving and investment if they believe that our GDP per capita is
significantly lower than it actually is, and that they might be better off elsewhere.
 Financial markets need accurate measures of New Zealand's ability to borrow and
repay debt. This impacts our financial institutions and our sovereign borrowing.
Measuring New Zealand's GDP properly is a key concern of credit rating agencies.
 We need well-focused informed economic and social policy. Clearly it is more
difficult to know whether these are working if there are doubts about the level of
GDP per capita, and whether our measure is truly comparable with that of other
countries, including that of our large trans-Tasman neighbour.
New Zealanders rightly worry about the extent to which New Zealand incomes have drifted
below the world's highest in the last 40 years, but how large is that drift, and how have the
gaps changed in more recent times? For helping answer those questions, good and
economically comparable data are vital. This paper does not answer the question "are we
closing the trans-Tasman gap"? However it does argue that the gap is not as wide as most
people think.
At the 2012 annual leader's meeting, the Prime Ministers of Australia and New Zealand
agreed that, to promote further reform and economic integration, the Productivity
Commissions of each country would conduct a joint study on the options for further reforms
that would enhance increased economic integration and improve economic outcomes. Given
this aim, a useful contribution could be to improve harmonisation of statistical measurement
in Australia and New Zealand, where appropriate, to improve data comparability.
While this has not been an exhaustive exploration of the issues we hope that the information
presented here helps people to better understand some of the pitfalls of international
comparisons and perhaps why New Zealand is often seen as an outlier.
In the meantime we observe that where there is scope for technical interpretations to differ,
Australia has tended to take the optimistic alternative and New Zeal