Can Gross Domestic Product (GDP) and Inflation Figures Be Trusted?

GDP figures are not an exact science. All over the world, GDP numbers are politicized and subject to heavy manipulation. There are at least 3 known methodologies to calculate GDP and, for each of these methodologies, there are two alternative formulas which take into account completely different economic sets of data.

Still: there are good proxies to GDP. For instance: the consumption of electricity in the residential (household) sector and in the industrial sector, adjusted for the size of the informal economy, for the change in personal incomes (including private credit), and for shifts in weather patterns (as measured by a multiannual time series of average temperatures). Macedonia's energy consumption has been growing by almost 4% annually for a few years now. This means that the economy is either stagnant or slightly contracting - but definitely not growing, as the government would have us believe.

Other proxies: money velocity; wage statistics (especially the wages of urban unskilled workers); crude death rate; infant mortality; and even the amount of mail sent per capita. Fluctuations in purchasing power (PPP) reflect the relative strengths of currencies, but also changes in GDP. All these measures indicate that Macedonia's economy is experiencing either weak growth or no growth at all.

True: Macedonia's Bureau of Statistics is implementing a 3-year program that will bring it ever-closer to Eurostat standards. BUT: as the case of Greece proves, this fact is completely irrelevant. Statistics are only as good as the government that issues them. If the Bureau is under political pressure to "massage" the figures, no amount of standards can help. The Bureau must be an autonomous body, with an independent budget, under no political pressure, with involvement of foreign experts, and answerable only to parliament. Otherwise, national statistics are only a sham and completely unreliable, never mind which standards are implemented.

The formula to calculate GDP (Gross Domestic Product) is this:

GDP (Gross Domestic Product) = Consumption + investment + government expenditure + net exports (exports minus imports) =

Wages + rents + interest + profits + non-income charges + net foreign factor income earned

But the GDP figure is vulnerable to "creative accounting":

1. The weight of certain items, sectors, or activities is reduced or increased in order to influence GDP components, such as industrial production. Developing countries often alter the way critical components of GDP like industrial production are tallied.

2. Goods in inventory are included in GDP although not yet sold. Thus, rising inventories, a telltale sign of economic ill-health, actually increases the GDP!

3. If goods produced are financed with credits and loans, GDP will be artificially HIGH (inflated).

4. In some countries, PLANS and INTENTIONS to invest are counted, recorded, and booked as actual investments. This practice is frowned upon (and landed quite a few corporate managers in the gaol), but is still widespread in the shoddier and shadier corners of the globe.

5. GDP figures should be adjusted for inflation (real GDP as opposed to nominal GDP). To achieve that, the calculation of the GDP deflator is critical. But the GDP deflator is a highly subjective figure, prone, in developing countries, to reflecting the government's political needs and predilections.

6. What currency exchange rates were used? By selecting the right "points in time", GDP figures can go up and down by up to 2%!

7. Healthcare expenditures, agricultural subsidies, government aid to catastrophe-stricken areas form a part of the GDP. Thus, for instance, by increasing healthcare costs, the government can manipulate GDP figures.

8. Net exports in many developing countries are negative (in other words, they maintain a trade deficit). How can the GDP grow at all in these places? Even if consumption and investment are strongly up - government expenditures are usually down (at the behest of multilateral financial institutions) and net exports are down. It is not possible for GDP to grow vigorously in a country with a sizable and ballooning trade deficit.

9. The projections of most international, objective analysts and international economic organizations usually tend to converge on a GDP growth figure that is often lower than the government's but in line with the long-term trend. These figures are far better indicators of the true state of the economy. Statistics Bureaus in developing countries are often under the government's thumb and run by political appointees.

Miscalculating Inflation in Macedonia

The most accurate yardstick of inflation is the GDP deflator (which includes the prices of capital goods and export and import prices). Regrettably, it is rarely used or mentioned in public.

The Consumer Price Index is not the same as the Living Expenditures Index.

The Living Expenditures Index measures the changes in the prices of the SAME products in a given period of time.

The Consumer Price Index measures the changes in the prices of products bought during a period of time, even if they are NOT the same products (in other words, even with changed consumption habits).

In other words:

The Consumer Price Index reflects the purchasing habits of the households which participate in the surveys.

This means that the measured level of inflation can be manipulated for political reasons by:

1. Changing the composition of the consumption "basket" (deciding the prices of which products and services will be included and what will be omitted)

2. Altering the weights (weight coefficients) of the various products and services within the consumption basket.

3. There is no agreed methodology on how to properly measure the service component in the economy (including government and public goods, rents, and barter or countertrade transactions). Choosing the "right" methodology can have a negative or positive effect on the level of measured inflation.

4. Including or excluding certain retail and shopping venues (such as e-commerce, catalog sales, open air markets, garage sales, and so on).

5. Constructing a non-representative sample of households for the survey by overemphasizing certain locales (e.g., urban, or West vs. east, North vs. South), certain socio-economic classes (e.g., the middle-class), or certain demographics (e.g., minimizing the roles of seniors and teenagers).

6. Exaggerating or minimizing the role of the informal (grey or black) economy.

Macedonia's consumption basket is skewed.

Examples:

Alcohol and tobacco (4%), health (3%), education (less than 1%), cost of government services and (imputed) rents (8%) are seriously UNDER-weighted.

But, even if we accept the basket as it is, the inflation figures published clearly do not tally with anyone's experience.

Example:

Food and alcohol together constitute 41% of the basket.

Everyone knows that food prices AND the prices of alcoholic drinks have gone up by at least 10% in 2007. The prices of many items doubled. The prices of most edible commodities went up by 40% in both Macedonia and in the world. With oil prices touching 100 USD per barrel in 2007, food prices skyrocketed everywhere

Yet, according to Macedonia's Bureau of Statistics, the prices of food products are up by 2.3% in 2007. Mysteriously, alcoholic drinks also rose by EXACTLY 2.3%. Skopsko i se e mozno.

This kind of blatant wrong data undermines the trust of the citizens in the official statistics published in Macedonia. Foreigners also take note.