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The Gross Domestic Product: Is it possible to get lasting growth?
By Gary Peart
Sunday, October 18, 2009
Before the late 1920's, nations did not have a systematic way of assembling national accounts, now more popularly referred to as the gross domestic product or GDP. The United States appears to have been the first to bring such accounts together. The first national accounts in the US were produced by Simon Kuznets, an economist at the University of Pennsylvania and presented to the US congress in a report dated January 4, 1934.
The national accounts became a useful tool for US economic planning during the second half of the Great Depression and during World War II.
In 1947, the United Nations set out standards for calculating the GDP for international comparability. Since then, the GDP has become the most widely used, single measure of a country's economic health or economic growth.
We will have read or heard in the news recently, for example, that the International Monetary Fund in its latest World Economic Outlook projects that Jamaica will have the fourth worst economic growth over the next five years among 32 developing nations in the western hemisphere. The growth rate projected by 2014 is 2.1 per cent.
This cannot be good but what does it all mean and more importantly, can anything be done about it?
What is the GDP?
I believe that it is incorrectly assumed that most people are aware of the meaning of gross domestic product. This may have arisen from the fact that a general definition of the GDP has been well publicised by now. But, is it equally understood by the general public?
The GDP is the market value of the final goods and services produced by a country during a given period. Final goods are those that are actually consumed as opposed to those that may be used to produce another good. When you buy a car, for example, it comes with tyres, a radio, DVD player, windshield and mirrors, among other things, that are usually made by separate manufacturers. The values of these intermediate goods are not counted again. They are already contained in the price of the automobile.
Our own Statistical Institute, STATIN, which has been assembling and publishing Jamaica's GDP since 1956, defines GDP this way: The Gross Domestic Product is the total unduplicated value of the goods and services produced in a country or region during a given period. By unduplicated, STATIN means just what I illustrated immediately before regarding intermediate goods.
STATIN GOES on to say that there are three equivalent ways to estimate the GDP:
. The "sum of incomes method" - adding up all the wages, salaries and profits from production of final products for a given period, plus fixed capital expenditures and taxes on production less subsidies on production.
. The "sum of final expenditures method" - adding up household spending and government spending on final goods and services; investment in fixed capital such as construction, machinery and equipment; change in inventories and exports, less exports.
. The "production method" - adding up the value added of all industries, plus taxes less subsidies on products. Value added is defined as the gross sales less purchases from other industries
STATIN employs the value added approach for monthly estimates and a combination of all three for annual.
What makes up the GDP?
The Table following shows the percentage contribution, by industry, to the value added for fiscal year ended March, 2009 at constant prices using 2003 as the base year, meaning that these prices are calculated at 2003 prices as well as at current prices, which are the market prices for the period.
Whether by constant or by current prices, the top five contributors to value added GDP are the same, in slightly different order. At constant prices, the order and percent contribution are:
1. Wholesale & Retail Trade, etc. 19.07 per cent
2. Transportation, Storage & Communication 11.98
3. Government Services 11.84
4. Finance & Insurance Services 11.56
5. Real Estate, Renting & Business Activities 9.95
At current prices, the order is:
1. Wholesale & Retail Trade 21.54 per cent
2. Government Services 12.56
3. Transportation, Storage & Communication 10.49
4. Real Estate, Renting & Business Activities 10.22
5. Finance & Insurance Services 10.03
Are these all sound areas in which to seek growth?
Going for growth
The target always is to grow the economy, meaning to grow the GDP, whether externally suggested or internally imposed. The questions are where and how? Various strategies have been discussed and attempted. Focus has been placed upon agriculture because it is an area of great promise, particularly if appropriate modern technology is applied. The fact is, Agriculture, Forestry & Fishing grew by 10.8 per cent in the second quarter of 2009 over the same period in 2008. This was driven primarily by favourable weather conditions and significant growth in vegetables, 17.8 per cent and root crops, 35.8 per cent, according to data from STATIN. How can the necessary labour force be attracted back into agriculture?
Another strategy has been to seek to bring the underground economy and other undocumented producers into the light. Where there are no data, there can be no monitored contribution to the GDP and there can be no measured growth. How can we overcome this hurdle?
The other point is that the growth in the economy that we seek needs to be environmentally and ecologically sound. For example, a substantial part of retail sales and repairs consists of automobiles. Is the growing of our automobile industry proceeding along environmentally and ecologically sound paths? The more gas we buy, the more we contribute to the GDP. And, the more cars we put on our roads, the more traffic jams we create. How much gas is burned going nowhere and what is the impact of the combustion and the exhaust fumes in general on the atmosphere and on our health? This is not an anti-automobile argument. It is merely a pro-environment thought.
Growing the economy should not boil itself down to a word or a number. To go for growth in the economy at all, and more so year over year for any extended period, means to have a plan by industry and a process that is shared with the population. In this way, more people and sectors may be encouraged to participate in the strategies designed to meet the country's financial needs while protecting the emotional and physical health of each citizen.
Gary Peart is the chief executive officer of Mayberry Investments Limited. You can email him at [email protected]
By Gary Peart
Sunday, October 18, 2009
Before the late 1920's, nations did not have a systematic way of assembling national accounts, now more popularly referred to as the gross domestic product or GDP. The United States appears to have been the first to bring such accounts together. The first national accounts in the US were produced by Simon Kuznets, an economist at the University of Pennsylvania and presented to the US congress in a report dated January 4, 1934.
The national accounts became a useful tool for US economic planning during the second half of the Great Depression and during World War II.
In 1947, the United Nations set out standards for calculating the GDP for international comparability. Since then, the GDP has become the most widely used, single measure of a country's economic health or economic growth.
We will have read or heard in the news recently, for example, that the International Monetary Fund in its latest World Economic Outlook projects that Jamaica will have the fourth worst economic growth over the next five years among 32 developing nations in the western hemisphere. The growth rate projected by 2014 is 2.1 per cent.
This cannot be good but what does it all mean and more importantly, can anything be done about it?
What is the GDP?
I believe that it is incorrectly assumed that most people are aware of the meaning of gross domestic product. This may have arisen from the fact that a general definition of the GDP has been well publicised by now. But, is it equally understood by the general public?
The GDP is the market value of the final goods and services produced by a country during a given period. Final goods are those that are actually consumed as opposed to those that may be used to produce another good. When you buy a car, for example, it comes with tyres, a radio, DVD player, windshield and mirrors, among other things, that are usually made by separate manufacturers. The values of these intermediate goods are not counted again. They are already contained in the price of the automobile.
Our own Statistical Institute, STATIN, which has been assembling and publishing Jamaica's GDP since 1956, defines GDP this way: The Gross Domestic Product is the total unduplicated value of the goods and services produced in a country or region during a given period. By unduplicated, STATIN means just what I illustrated immediately before regarding intermediate goods.
STATIN GOES on to say that there are three equivalent ways to estimate the GDP:
. The "sum of incomes method" - adding up all the wages, salaries and profits from production of final products for a given period, plus fixed capital expenditures and taxes on production less subsidies on production.
. The "sum of final expenditures method" - adding up household spending and government spending on final goods and services; investment in fixed capital such as construction, machinery and equipment; change in inventories and exports, less exports.
. The "production method" - adding up the value added of all industries, plus taxes less subsidies on products. Value added is defined as the gross sales less purchases from other industries
STATIN employs the value added approach for monthly estimates and a combination of all three for annual.
What makes up the GDP?
The Table following shows the percentage contribution, by industry, to the value added for fiscal year ended March, 2009 at constant prices using 2003 as the base year, meaning that these prices are calculated at 2003 prices as well as at current prices, which are the market prices for the period.
Whether by constant or by current prices, the top five contributors to value added GDP are the same, in slightly different order. At constant prices, the order and percent contribution are:
1. Wholesale & Retail Trade, etc. 19.07 per cent
2. Transportation, Storage & Communication 11.98
3. Government Services 11.84
4. Finance & Insurance Services 11.56
5. Real Estate, Renting & Business Activities 9.95
At current prices, the order is:
1. Wholesale & Retail Trade 21.54 per cent
2. Government Services 12.56
3. Transportation, Storage & Communication 10.49
4. Real Estate, Renting & Business Activities 10.22
5. Finance & Insurance Services 10.03
Are these all sound areas in which to seek growth?
Going for growth
The target always is to grow the economy, meaning to grow the GDP, whether externally suggested or internally imposed. The questions are where and how? Various strategies have been discussed and attempted. Focus has been placed upon agriculture because it is an area of great promise, particularly if appropriate modern technology is applied. The fact is, Agriculture, Forestry & Fishing grew by 10.8 per cent in the second quarter of 2009 over the same period in 2008. This was driven primarily by favourable weather conditions and significant growth in vegetables, 17.8 per cent and root crops, 35.8 per cent, according to data from STATIN. How can the necessary labour force be attracted back into agriculture?
Another strategy has been to seek to bring the underground economy and other undocumented producers into the light. Where there are no data, there can be no monitored contribution to the GDP and there can be no measured growth. How can we overcome this hurdle?
The other point is that the growth in the economy that we seek needs to be environmentally and ecologically sound. For example, a substantial part of retail sales and repairs consists of automobiles. Is the growing of our automobile industry proceeding along environmentally and ecologically sound paths? The more gas we buy, the more we contribute to the GDP. And, the more cars we put on our roads, the more traffic jams we create. How much gas is burned going nowhere and what is the impact of the combustion and the exhaust fumes in general on the atmosphere and on our health? This is not an anti-automobile argument. It is merely a pro-environment thought.
Growing the economy should not boil itself down to a word or a number. To go for growth in the economy at all, and more so year over year for any extended period, means to have a plan by industry and a process that is shared with the population. In this way, more people and sectors may be encouraged to participate in the strategies designed to meet the country's financial needs while protecting the emotional and physical health of each citizen.
Gary Peart is the chief executive officer of Mayberry Investments Limited. You can email him at [email protected]
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