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Assessing the Accuracy of GDP International League Tables

GDP, or Gross Domestic Product, is the measure of the total value of goods and services produced in a certain economy over a given time period. Time period typically spans a year but may also be every quarterly. Economists use three methods in measuring national income, and all of them - income, expenditure, and output - apply to Gross Domestic Product. All three methods produce, expectedly, the same outcome. However, in practice, discrepancies appear as a result of errors in compiling statistical data.

Below is the gross domestic product formula: 

GDP = C + I + G + X - M

Where:

C = Consumption
I = Investment
G = Government spending
X = Exports
M = Imports 

 

I is composed of two parts. GDFCF is gross domestic fixed capital formation and secondly, net change in stocks.

In order to increase the accuracy of National Income (Yn) figures when using the expenditure measure, it is necessary to remove the distorting effect of expenditure taxes and subsidies. This process is known as the factor cost adjustment and involves the deduction of the value of expenditure taxes and the addition of the value of any subsidies.

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A further distortion to Yn figures is the rate of increase in prices (inflation), and a statistical adjustment is necessary to remove the impact of inflation. This statistical adjustment is known as the GDP deflator.

National income figures are used for measuring changes in the standard of living. In order to increase their accuracy, it is necessary to take account of different population sizes by dividing the GDP by the size of the population. This figure is known as GDP per head, or more usually, GDP per capita.

GDP per capita provides a basis for comparison of growth rates and standards of living internationally. They give a general picture of how states are performing. However, there are drawbacks to using GDP per capita as a means of comparing relative standards of living.

Some countries use methods of statistical collation which are much more accurate than those used in other countries. For example, the collation technique in Britain would probably be more accurate than in a country such as Myanmar.

The GDP per capita figures need to be adjusted due to varying inflation rates around the world. A country which has higher inflation will see its value of GDP increasing relatively faster than a country with a lower inflation rate. Assume, for example, that Country A has an annual inflation rate of 4% and Country B has a high inflation rate of 10%. If they both produce goods at the beginning of the year, which when converted into dollars are both worth $100, then by the end of the year, Country A's goods will be worth $104, and country B's goods will be worth $110, other things remaining equal.

There is the need to adjust for varying sizes of population. Not all countries are able to carry out an accurate census. In developed countries, such as Germany, the UK, and the USA, it is relatively easy to find out the size of the population, because of birth and death registrations. However, in a Third World country, there would be many people who are not on such a register.

For international comparisons, it is usual to translate the figures into American dollars ($US). Therefore, the extent of currency volatility against the $US may be a further distorting factor. In 1990, for instance, the gross domestic product of China was 1,769 billion Yuan. If this GDP is converted into $US, it would be 4.78 Yuan = $1. Expressed in $US, the Chinese GDP was $370 billion. To gain the GDP per capita, this was divided by the population of 1,139 million: 

$370,175,000,000 = $325 per capita x 1,139,000,000



In comparison, the US in 1990 had a gross domestic product of $5,346 billion and a population of 250 million Therefore the GDP was: 

$5,346,000,000,000 = $21,384 per capita 250,000,000



If the dollar had been worth a different amount against the Yuan, the figure for China's GDP may have been quite different altogether.

 

GDP per capita merely gives an average figure for the country concerned, taking no account of disparities in wealth. The GDP per capita in Saudi Arabia is totally unrepresentative of the standard of living for the vast majority since 10% of the population account for 90% of the income and wealth. GDP per capita is thus a very general figure.

GDP per capita takes no account of the proportion of resources allocated to consumer goods and public services. Therefore, a country which is allocating more resources to capital goods and an increased military spending may have an understated gross domestic product.

National income figures may also understate the true level of economic activity or standard of living in a country since some economic output may go unrecorded. The black market operates in every country, and as the transactions go unrecorded, as much as 10-15% of a country's economic activity may be unaccounted for. Self-sufficiency is also a weakness with the GDP figures. Do-it-yourself activities are unrecorded, such as people decorating for themselves or fixing their cars, instead of hiring someone else to do it for them. Villages in tribal societies, such as some of the third world countries, produce for themselves, or are still relying on barter. These figures can also go unrecorded in the GDP figures.

Most people would accept that pollution, road traffic and housing congestion all detract from the standard of living, but the official figures take no account of this.

GDP per capita also takes no account of the hours worked. Therefore, the countries earning the highest GDP per capita could have an average working day of 13 hours, whilst a country with a lower GDP could have an average working day of only 8 hours.

All of the factors which have been mentioned above illustrate that GDP figures are valuable as indicators of standards of living, but there are many faults which can be found with this method of measurement.

There are other measures of national income, which when used in conjunction with GDP per capita, may help to give a more complete picture of living standards. These include the number of doctors per 1,000 population, the number of hospital beds per 1,000 population, the percentages of houses with piped water supply, the percentage of houses with electricity supply, the percentage of the population with full-time education, the average hours worked per week, the average number of holidays per year, the percentage of households with television sets, the percentage of households with a refrigerator, and the percentage of households with a car.

In summary, while the GDP figures are useful to gather a general idea of standards of living, these figures can become more valuable when combined with other indicators, due to factors which make it a rather unfair measure of income.

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