Could The GDP Figures Be Bogus?
By Hema Senanayake - December 11, 2013
Hema Senanayake
GDP (Gross Domestic Production) is the most common measure of all “goods and services” produced in a country. Since GDP corresponds to the goods and services produced, in general, this figure corresponds to the annually increased wellbeing of the people the country or in any province.
Hence politicians usually quote the percentage of GDP growth to prove the increased wellbeing of citizens. TNA Parliamentarian Sumanthiran said in the parliament that Minister of Foreign Affairs Prof. G.L. Peiris, in a recent visit to the U.S. had submitted that the North Province was recovering. In order to justify his argument he had submitted that GDP growth in the Northern Province was over 25%. Further, Sumanthiran openly claimed in the parliament that G.L. Peiris had to retract it later. Why? I do not know. But I know that the United States has a norm in negotiating with foreign countries; that principle or the norm is, “we trust, but verify.” Perhaps, application of this principle by U.S. officials might have led the Minister of Foreign Affairs to retract from his original submission.
Pointing this incident out, Sumanthiran claims that GDP figures are bogus in Sri Lanka. But he did not mean that the calculation of GDP itself is wrong but I guess he claims that GDP growth figures are not corresponding to the increased wellbeing of people; in that sense GDP figures are bogus. Can this be happened? I think Prof. G.L. Peiris knows the answer better than anybody. My answer to the question is “Yes.” Today let us investigate about it in brief.
What the government is supposed to be doing economically? The short answer is that the job of the government is to produce what is known as “common interests” for the wellbeing of the members of the society. What are the most common “common interests”? Some of those are general administration, maintenance of law and order, general health care, education, taking care of poor and those who are unable to work, infrastructure development, research and development, etc. These “common interests” or services are not sold. In economics what is not sold to generate profit is considered as consumption. Hence, in general, these ‘common interests’ falls into the category of consumption not into the category investment.
In a previous article, I pointed out that the wellbeing of citizens is depended upon the consumption of “consumable output.” Since the production of common interests falls into the category of consumption, any production of common interests must increase the wellbeing of citizens. For example, a long ago the government decided to spend money for free general education and that increased the wellbeing of the people in general. Therefore, the production of these services must be accounted in Gross Domestic Production (GDP). Being true to our logic, the production of “common interests” is duly accounted in GDP.
However, due to the calculation procedure of GDP, sometimes there are chances to record the production of “common interests” without producing such services at all. TNA Parliamentarian Sumanthiran says that mostly this is the case with the present government not only in the Northern Province but in the whole country itself. He expressed this sentiment in two of his speeches during the budget debate. What is the effect of such a situation? In such a situation, the GDP is nominally increased but the wellbeing of the people is not increased. In order to understand this dilemma, let us briefly revisit the calculation of GDP. It is easy to understand.
