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how are GDP numbers calculated?

Wednesday 24 September, 2008

As a recovering economist, I read with interest this article by Ellen Simon in the Chicago Tribune Economists not buying revised GDP. The main premise is that the means to acquire this data is underfunded, which leads to inaccuracies & wild swings in the data as revisions come out.

How national economies are valued has changed over time, from when Gross National Product (GNP) was revised to become Gross Domestic Product (GDP) to reflect changes in services & imports/exports.  Economics is riddled with assumptions, so I don’t think that’s really the issue.  I don’t know how “foreign inflation” is different from domestic inflation.  Using deflators to adjust inflation from nominal into real GDP is a time-tested practice.  Who calculates them & how could be an issue.  Otherwise, I don’t buy these arguments.

What’s important is the integrity of these numbers.  I wouldn’t be surprised if economic numbers are being manipulated for political gain, i.e. revised upward so that the current party retains its hold on the presidency. I’m not sure how separate the powers that be are here.  My assumption is that although the Secretary of Commerce sits on the cabinet, the Commerce Department reports to Congress.  These statistics have to be calculated at arms length, far from the influence of politicians.  Given the current administration’s penchant for trying to change anything/everything it can for its own political gain, whatever they might have done to skew numbers in their favor wouldn’t surprise me.

The United States is known to have the most open & transparent reporting practices in the world.  In many of the other developed economies of the world, financial statements are offered in terms of active vs. passive income, etc.  (I can’t even comprehend how accurate or inaccurate numbers for developing economies may be.)  This is a big part of the reason the US has the biggest & most dynamic financial markets.  The more that’s reported, the less perceived risk there is, the safer people feel in investing in companies that report more.  I understand the US Financial Accounting Standards Board (FASB) is considering changing financial reporting requirements to adhere more to international standards than US standards, in other words, to report less rather than more.  My main point is:  If we can’t trust numbers provided by the US government, whose can we trust?

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2 comments

  1. I guess my main point is any numbers put together by a government have the possibility of being affected by politics. I would bet the Danes are better than most, but I was surprised to find American numbers questioned.
    Interestingly, I found another article which mentions the Danes & links them to happy Chicagoans (another earlier blog entry):
    http://www.chicagotribune.com/features/lifestyle/chi-0824-happy-danesaug24,0,6494059.story


  2. Mike, how about trusting Denmark’s numbers. Consistently rated as the least corrupt country year over year….?



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