Measuring Economic Output - CFA Institute Files/Compiling GDP... · 2015-06-05 · Measuring Economic Output Challenges in Compilation and Interpretation Anila Dias Bandaranaike,

Measuring Economic OutputChallenges in Compilation and Interpretation

Anila Dias Bandaranaike, Ph.D.22 February 2010

I gratefully acknowledge the valuable input and permission to use his own work given by Mr. Susantha Ariyaratne, Deputy Director, Central Bank of Sri Lanka, in the preparation of this presentation.

Why Compile or Disseminate Statistics?

“Why do statistics matter? In simple terms, they are the

evidence on which policies are built. They help to

identify needs, set goals and monitor progress. Without

good statistics, the development process is blind -

policymakers cannot learn from their mistakes and the

public cannot hold them accountable. “

World Bank, World Development Indicators 2000

It is in everyone’s interests to promote publiclyaccessible and reliable statistics.

History of National Accounts

• Great Recession 1929 -1933

The global economic recession in the 1930s emphasised theneed for detailed information relating to economicperformance. In 1939, the League of Nations first publishednational income estimates for 26 countries.

• Mexican Crisis – 1995

Economists emphasised that the crisis could have beenavoided, if data on the latest economic performance wereavailable. As a result, IMF encouraged it’s member countriesto compile quarterly national accounts to provide moredetailed information at shorter frequencies.

Source: S. Ariyaratne

Three Compilation Methods

• Production (GDP): Value of total output of theeconomy.

• Income (GDI): Sum of incomes of all factors ofproduction (labour, capital, land andentrepreneurship)

• Expenditure (GDE): Sum of all expenditures inthe economy on final goods and services.


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Basic Equations for Output• Production Approach

GDP = sum of values of all final goods and services= total value-added = total value of production-cost of inputs= total revenue from sales – total purchases from other firms

• Income ApproachGDI = sum of all factor incomes (payments)

= salaries & wages+ rent + interest + profits + selfemployment earnings

• Expenditure ApproachGDE = domestic demand +net external demand = C+ I+(X – M)o C = Total Consumption = CP +CG = (Private C + Government C)o I = Total Investment = IP +IG = (Private I + Government I)o X = Exports of Goods and Serviceso M = Imports of Goods and Services

GDP=GDI=GDE

Nominal and Real Output

• The value of output can be measured either incurrent rupees (nominal) or in constant rupees(real).

• Nominal valuation uses prices of goods andservices prevailing in the current period to valuethe current period’s output.

• Real valuation uses prices of goods and servicesprevailing in an earlier period, called the baseperiod, to value the current period’s output.

• Real values are the appropriate ones to measurethe level of economic activity.


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GDP and GNP

• GDP measures the total output produced by factors of production located in the domestic economy regardless of who owns these factors.

• GNP measures the total income earned by resident citizens regardless of the country in which their factor services were supplied.

• GNP= GDP-NFIA

• Per Capita Income

– GDP Per Capita = GDP/Total Population

– GNP Per Capita = GNP/Total PopulationSource: S. Ariyaratne

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Implicit Price Deflator

• Availability of nominal and real GDP over thesame period implies the existence of a priceindex measuring the change in prices over theperiod,,implicit price index (IPI).

IPI = GDP at current prices * 100

GDP at base period prices


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Compilation

• The System of National Accounts is a manual prepared by the United Nations for National Accounts compilation. It encourages compilers all over the world to follow similar compilation practices and methodologies.

• However, it also allows freedom to individual countries to modify their methods according to the structure of their economies and data availability.


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Methodology-Production Approach

• Gross Domestic Product (GDP) is the value offinal goods and services domesticallyproduced. The insistence of final goods andservices is simply to make sure that we do notdouble count. Double counting is avoided byworking with value added.


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Methodology- Production Approach

• Value Added = Value of Production – Material Inputs


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Activity Value Value Added

Farmer Farming 100 100

Miller Milling 140 140-$100 = 40

Baker Making Bread

180 180 – 140 =40

Seller Selling 225 225 – 180 = 45

Value Added

100+40+40+40 = 225

Production Approach -Useful Concepts

• Economic Growth and Sectoral growth

• Sectoral composition

• Contribution to growth

• Cross sectional and time series data

• Structural changes over time

• Response to macro-economic changes

• International comparisons


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Income Approach - Useful Concepts

• Personal Income

• Disposable Income

• Income Structure

• Wages/Profit Ratio

• Retained Profits for Investment


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Production or Income Approach - Data• Structure - 3 Major Sectors

o Agriculture, Forestry & Fishing (14 sub- and sub-sub categories)

o Industry (14 sub- and sub-sub categories)

o Services (12 sub- and sub-sub categories)

• Compilation

o Based on availability and reliability of data for each sub-sector

o Direct methods if required data available

o Indirect methods if direct method not possible –using links with related data and proxy variable(s)

Expenditure Approach – Useful Concepts

• Aggregate Demand

• Sources of Consumption

• Investment Ratio

• Savings Ratio

• Domestic Savings and National Savings

• Resources (Savings minus Investment) Gap

• Government Sector vs. Private Sector

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Expenditure Approach- Data• Consumption

o Private consumption base from Household I&E surveys

o Government expenditure on purchases of goods and services

• Investment

o Government Expenditure on Fixed Assets and Capital Transfers

o Private Investment in Building and Construction taken from production approach

o Investment Goods Imports (Plant & Machinery, Transport Equipment, Other Capital goods)

• External Demand

o Merchandise exports and non-factor services earnings from BOP account

o Merchant import and non-factor services expenditure from BOP account

Limitations to Applying Methodology

• Black (Illegal) economy

• Informal nature of labour market

• Size of Informal economy (all 3 factors)

• Contribution of housewives/self employed

Value Added Method

• Value Added (VA) = Gross Value of Production (GVP) – Cost of Material Inputs (MI).

• Example: Value Added of Paddy

VAP = {Paddy Production* Paddy Producer Prices} –{Material Costs incurred: fertiliser; weed, pest and disease control costs, diesel for power, etc}


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Alternative Method

• Even though income approach is the least commonly used of the three approaches, it is potentially useful as an alternative measure of GDP if the production approach has serious data problems.

• Value Added = Compensation to employees + Operational surplus + Depreciation


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Tea

• Tea: {Green leaf production* Producer price of green leaf}-{ fertilizer + other inputs }

• To measure real value added, current value added should be deflated by the producer price index for green leaf. The usual practice is to assume that cost structure prevails at base period level and apply production growth to extrapolate the real value added.

• A Comparison: Tea Exports Rs Mn. 200,938, Value Added Rs Mn. 27,628 in 2008


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Vegetables

• Unlike tea or paddy, vegetables represent a group of items grown all over the country throughout the year.

• Department of Census and Statistics provides production data, on seasonal basis, for selected items.

• A production volume index is used to measure real value added.


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Minor Export Crops (MEC)

• MEC means a variety of crops - coffee, pepper, cinnamon, cloves, cardamoms, betel leaves, cocoa, cashew nuts, arecanuts, cut-flowers etc.

• The contribution of one item to the national economy may be negligible, but as a whole their contribution is considerable.

• There is no proper production data base for these items.

• To compile VA, rely on export value and volume indices.


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Factory Industry

• Factory Industries include all manufactured products (excluding cottage industries) ranging from food processing to aero planes.

• In many countries, value added of factory industries is measured using industrial volume indices.

• The sub indices in the overall index give the sector-wise performance in industrial production.


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Construction Industry

• Data limitations due to Informal nature of industry

• VA is based on an indirect method using the value of inputs - building materials such as cement, steel, PVC, asbestos etc, government expenditure on road, bridges and other infrastructure projects and construction services provided by state and private sector institutions

• Current Value Added is deflated by the Cost of Construction Index (ICTAD) to obtain Constant Value Added.


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Banking Industry

• GVP = Net interest income + Non-interest income

• Material Inputs = rent, general administration costs such as telephone charges, insurance payments, costs of minor repairs, and maintenance of premises and equipment.

• Current value added is deflated by a suitable price index for real value added.


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Insurance Industry

• Current Value Added: Salaries and Wages + Operating Surplus + Depreciation

• To obtain constant value added, current VA is deflated by a suitable price indicator.


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Education

• How do national accountants “value” the teaching provided by school teachers?

• In theory, it is their salary determined by the market. Therefore, the value added of state government education is the total salary bill in the government budget for education.

• What about unregulated “international” schools?

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Education – contd -

• The Private tuition industry has been rapidly growing in Sri Lanka in recent years, but difficult to capture performance of the industry, as there is no data-base.

• Consumer Finance Surveys provide household expenditure on tuition, but at intervals of five years.

Public Administration and Defence

• In theory, the current value added of the public sector should be the total wage bill of all government employees.

• What is the effect of ad-hoc wage increases unrelated to output on this calculation?

• Real Value Added can be compiled using state employment numbers and constant wage rates.

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Flow Chart of Data Processing

Secondary SourcesPrimary Sources

Central, Local, Provincial and Semi- Business Enterprises,

Households,

Government. Institutions, Private Sector Individuals

Entities , International Agencies

Output - Products

Users

Policy Makers; State,,Business, Academic and civil society

institutions; International Agencies ; Households; General Public

Input - Data

Process

Disseminate

Collecting Data• Why?

Every unit of additional information adds to the total

Frequency of availability enhances assessment

Timely statistics provide for informed decision making

• How? Use authority to collect under various acts (MLA,

Census Ordinance, Statistics ordinance, etc.)

Assure confidentiality

• When? Routinely collected in standard formats

Periodic questionnaires (monthly, quarterly, annual)

ad-hoc requests for specific information

Problems with Access to Data• Misgivings at source

o Information will go to our competitors

o Information will go to our tax file

o Request is to harrass us

• VERY Low priority at source

o Request completely ignored

o Request often misplaced or lost

o Request given to junior officer and not monitored

• Weak MIS Systems at source

o MIS do not exist

o MIS exist but extraction of regular reports not possible

o MIS not user-friendly or technologically backward

Challenges to Compilation

• Official resources inadequate to meet data requirements

• Limited timeliness and frequency of sector-specific data

• Inadequate attention to internal consistency of data

• Limited analysis of disseminated data

• Inadequate dialogue and debate on data in the public domain

Red Flags• Check consistency among all related sources of information – e.g.

output, price changes and labour; capital goods imports, private credit growth and investment

• Check links – e.g. cement availability , building material imports and construction growth, domestic trade and output for domestic market

• Check subcategories performance with sectoral performance- e.g. road, rail, air and sea transport with total transport - cross-checking among all supporting sources of information inadequate

• Check consistency with fiscal position -Government revenue and expenditure, loan disbursements and investment, etc.

• Check consistency over time – previous period imports and raw material production vs. current period output e.g. factory industry

Outcome in the Current Context

• Assessment often based on perception, rather than fact

• Limited informed and focussed discussion on economic changes

• Erroneous perceptions about who is responsible -we all are

• Reliability of estimates will decline unless sources and users are more proactive – analyse and critique

Food for Thought

Quality of statistics will decline unless sources and users are more proactive

• Suppliers and users have responsibilities towards improving national information systems

• Improve MIS at enterprise level and respond to official requests for information

• Engage in informed discussion based on facts, not perceptions

• Provide analysis and critical feedback to compilers of available statistics

Thank You

Measuring Economic Output - CFA Institute Files/Compiling GDP... · 2015-06-05 · Measuring Economic Output Challenges in Compilation and Interpretation Anila Dias Bandaranaike,

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