[OPE] FedEE's critique of GDP

The conventional measure for economic growth is gross domestic product (GDP). This includes many non-productive elements such as 'final consumption expenditure by general government'. Moreover, it does not take into account overseas income generated by corporations which is not taxed in the country where they are principally based. Significant underestimates in economic growth also arise because the calculations used to estimate real GDP do not allow for the true effects arising from changes in technology. Perhaps most importantly of all, however, government statisticians are forced to use two 'fudge factors' to produce GDP figures. The first is called a 'statistical discrepancy adjustment' which allows gross domestic income to be converted to gross domestic product. The second factor is 'seasonal adjustment', which removes seasonal effects from a time series in order to iron out certain non-seasonal features and the effects of changes in the number of trading days. Both these adjustments are based on estimates and are vulnerable to political manipulation.

The extent of the effect of seasonal adjustment on German GDP figures can be seen in the year-on-year comparisons for the first and second quarters of 2008. Although GDP rose from 1.8% over the year to Q1 2008 to 3.1% over the year to Q2 2008, the seasonal adjustment turned the improvement into a contraction of the German economy. Finally, closer examination of the European Commission's predictions indicate that, although a short-term contraction is predicted for Germany, Spain and the UK, annual rates for real GDP remain positive both for 2008 and 2009 and very much in line with the rest of the EU.
Although GDP rose from 1.8% over the year to Q1 2008 to 3.1% over the year to Q2 2008, the seasonal adjustment turned the improvement into a [-0.5%] contraction of the German economy. Finally, closer examination of the European Commission's predictions indicate that, although a short-term contraction is predicted for Germany, Spain and the UK, annual rates for real GDP remain positive both for 2008 and 2009 and very much in line with the rest of the EU.

Problems with the construction of GDP figures mean that predictions cannot be reliably based on short-term quarterly variations. Current EU predictions for 2008 and 2009 as a whole indicate that all EU countries will experience significant future growth and that the three 'recession states' pinpointed by the European Commission will experience growth rates broadly in line with the rest of the EU. The improvement of company margins in several key sectors during the last two years will help many enterprises ride out the downturn. For this reason, recovery could also be far quicker than in past economic cycles when the upturn finally comes. http://www.fedee.com/GDPprojections.shtml

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Received on Wed Oct 1 14:44:25 2008