Misguiding Economic Statistics?

l by Dr. C.S. Weeraratna

(November 02, Colombo, Sri Lanka Guardian) Statistical data are put out by various organizations such as the Dept. of Census and Statistics, (DCS) Central Bank (CBSL), Department of Meteorology etc. Some of these data such as population, rainfall, temperature are straightforward and clear. However, some economic statistical data such as Gross Domestic Product (GDP), Per Capita Income (PCI) and Poverty Level, the manner in which they are computed, tend to be misleading, though these statistics are widely used by policymakers, economists, international agencies and the media to indicate the state of economy of a country. This article intends to examine to what extent these data are reliable and misguide the public. (Most of the information given in this article has been obtained from the Internet.)
The poverty line is the minimum level of income deemed necessary to achieve an adequate standard of living in a given country. In practice, the official or common understanding of the poverty line is significantly higher in developed countries than in developing countries. The common international poverty line has in the past been roughly $1 a day.
Gross Domestic Product:
Gross Domestic Product (GDP) was introduced during World War II as a measure of wartime production capacity. It has become the foremost indicator of economic progress of a country. It is merely a value of gross total of products and services during a period and only gives a partial account of how wealthy a country is or is not.
According to CBSL, GDP (G) is computed as the sum of the value of all agricultural (A) and industrial (I) goods produced and services (S) during a specific period. G = A+ I+ S For example, according to CBSL, the GDP of 2010 is Rs. million 5,602,321 which is the sum of A ( Rs. 716,892 million) I ( Rs. 1,649,141 million) and S (Rs. 3,236,2888 million). A includes the value of all perennial and annual crops, livestock, forestry and fishery produced during 2010. ‘I’ indicates the value of industrial products (manufacturing, construction, electricity produced etc.) and S includes imports, exports and domestic trade, government spending etc. Government spending is the sum of government expenditures on goods, services and includes salaries of public servants, purchase of weapons for the military and any investment expenditure by the State.
GDP assumes that every monetary transaction adds to well-being. It does not consider the expenses involved in the production of goods and services. For example in computing the GDP for 2010, the value of tea produced during the 2010 is considered but not the cots involved. Any economist would agree that producing 1,000 kg of tea at Rs. 100 per kg and selling at Rs. 150 per kg is better than producing 2,000 t at Rs. 200 per kg and selling at the same price. Thus, a higher GDP due to an increase in production of tea does not indicate an effective increase in production. Natural resources are used in the production of many goods and services resulting in an increase in GDP. But, during this process there is degradation/pollution of natural resources which is not taken in to account. Greater the depletion of natural resources, the higher the GDP goes up.
The overall gross domestic product of a country has several shortfalls. It doesn’t consider the quality of life of the people living in the country. Devastating natural disasters such as floods, droughts, landslides etc. that destroy the lives and homes of hundreds bring about an increase in government expenditure, increasing the GDP. Thus, the GDP is over estimated. GDP increases with polluting activities and then again with clean-ups. Clean-up of solid waste sites which costs a large sum of money gets added to the GDP.
GDP treats crime and natural disasters as economic gain. With increase in crimes, government has to spend more and the GDP rises. The expenditure on a 30-year-long war in our country would also have been added to the GDP.
The outcome of the project initiated by the government, ‘Divi Neguma,’ which involves the cultivation of thousands of acres with domestic crops and activities such as childcare, elder care, other home-based tasks and volunteer work in the community are not accounted for in the GDP as there is no money transaction. As a result, GDP is understated.
In recent years, consumers and the government have increased their spending by borrowing. This increases the GDP temporarily but the need to repay this debt with interests becomes a growing burden on our national economy. But, the fallout of foreign borrowings is completely ignored in calculating the GDP.
Imports also increase the GDP. The imports during the last few years have increased considerably. In the year 2000, imports cost US $ 7320 million but they have increased to 13,512 in 2010, causing the GDP to rise.
Hence, a high GDP does not necessarily indicate an increase in the productivity of a country and vice versa, and it can be considered a dumb value with no significance.
Per capita Income:
Per capita income (PCI) or income per person in a country is the numerical quotient of national income of the country divided by its population, in monetary terms. If the distribution of income within a country is skewed, a small wealthy class living in luxury can increase per capita income even though most of the people have to live with difficulties. An increase in per capita income is not an indication of the increase in people’s wealth because a rise in the cost of living offsets high PCI. The average monthly household expenditure according to DCS has increased from Rs. 19,151 in 2005 to Rs. 31,331 in 2009/2010. Hence, increasing the PCI has no relevance to the actual income of a person or the well-being of people. PCI without per capita expenditure being given consideration has no meaning.
Poverty
The poverty line is the minimum level of income deemed necessary to achieve an adequate standard of living in a given country. In practice, the official or common understanding of the poverty line is significantly higher in developed countries than in developing countries. The common international poverty line has in the past been roughly $1 a day. In 2008, the World Bank came out with a revised figure of $1.25. Thus, a person with a daily income of over $1.25 (app. Rs. 150) is not considered poor. According to the Dept. of Census and Statistics (DCS), the poverty line as at August 2011 is Rs. 3,241.00 per month. However, according to the DCS, in 2009/10 the mean Household Expenditure for an average family of four was Rs.31, 331 per month. In august 2011, this value is likely to be higher. Based on the Minimum Expenditure per person per month, it is surprising to note that the DCS has given the poverty line as Rs. 3,241 per month.
In view of what is highlighted in this article it would be more meaningful if those concerned formulate better criteria to measure GDP, PCI and Poverty.

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Author: Sri Lanka Guardian

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