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Ask Citywire: How is economic growth measured?

For a second time this year economic growth has beaten expectations, but what is it and why are the forecasts so wrong?

 
Ask Citywire: How is economic growth measured?

For a second time this year economic growth has beaten expectations, but why are the forecasts so wrong and is growth really a desirable goal?

How is growth measured?

Growth is seen by many as a social good since it is assumed that growth will drag the poor out of poverty.

The Office for National Statistics is responsible for gathering data about the UK economy. It measures the value of goods and services, the gross domestic product (GDP), four times per year.

The estimate is based on sales at around 40,000 companies and prices of around 200,000 products. The ONS says the first reading of GDP – three are produced for each quarter - covers about 40% of the data that will be included in the final reading and the rest of the estimate is based on forecasts.

 

Since the data measures the value of goods it is then adjusted for inflation to give us real GDP.  

But the data doesn’t include the black economy and at a meeting this week the chief executive of Google UK said the full value of the online business in the UK is not being accounted for either.

Why is the data revised?

RBS’s Ross Walker was the only economist surveyed by Bloomberg that was spot on when it came to predicting yesterday’s third quarter growth number, which at 0.8% was twice as high as forecast.

Walker points out that much of the data on business services and finances is very preliminary. He said it is revised as firms get a better idea of their own business and as tax receipts are used to provide a better picture.

It isn’t surprising that the data is revised given that the first reading in the UK is produced just 25 days after the end of the quarter – faster than in any of the other larger economies.  

Former Bank of England deputy Governor Rachel Lomax once estimated it takes up to three years to get a really accurate picture of the economy. 

 

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8 comments so far. Why not have your say?

huudi

Oct 28, 2010 at 14:31

So 40% is based on sales and prices, sounds like a measure of inflation to me. The remaining 60% is estimate? well that really is a recipe for book-cooking, I bet gordon loved that!

As this is so inaccurate, I think we must consider the cost of this guesswork. Should be on the Quango redundancy list but anyone producing a good line in bull always hangs on.

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Cynic

Oct 28, 2010 at 14:31

Since this is a statistical exercise presumably there is a margin of error figure ( + or - x%) that should accompany these forecasts. With such low figures presumably the true range is something like 0.3% to 1.3% which in either case can paint a totally different picture. Can anybody help me here?

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huudi

Oct 28, 2010 at 15:07

thanks Deb, you really seem to have covered everything, so when production declined we switched to measuring service industry. Which of our elite thought of that? By 'service' they probably mean burgers and pizza, Wow!

I think my final definition in the forum was spot on ie: greed, waste and falling standards.

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Jeremy Bosk

Oct 28, 2010 at 19:49

The definition of "service sector" is here:

http://en.wikipedia.org/wiki/Services_sector

with a list of the activities included.

It is worth remembering that industry in general has transformed its organisation in recent decades. So for example the canteen staff at a factory were once counted under manufacturing. They are now likely to be employed by Compass or Sodexho and counted as working in the service sector. The same people doing the same job. Similarly security, HR, cleaning, payroll etcetera are all likely to be outsourced.

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huudi

Oct 29, 2010 at 15:46

As you mention Compass, I remember when My employers canteen was contracted out to them. We gave them cash & airline perks, in return we received smaller plates, higher prices and our roast was replaced with a cheaper menu. also the canteen staff took a cut in pay.

This today would be called 'economic growth'.

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Jeremy Bosk

Oct 29, 2010 at 17:00

Huudi

As you say, outsourcing is often accompanied by falling standards.

My point was really that the decline of manufacturing is exaggerated. Under older forms of industrial organisation measures of classifying business sectors were less accurate. The Standard Industrial Classification Code (SIC) needs to be used alongside the Standard Occupational Classification (SOC) to get a more meaningful picture.

If your old employer saved money then its profits would rise (or in the airline industry losses would fall). But employees would lose income and shareholders would gain So unless your employer used the savings to invest in growth there would be simply a transfer of income but no growth. In any case, GDP is Gross Domestic Product and measures the value of production, not incomes.

Of course goods and services produced are sold which produces income and there is a number called Gross National Income (GNI) which is related to GDP. The complicating factors are imports, exports and transfers like those between employees and shareholders or tax payers and benefit recipients.

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david Bhatti

Oct 31, 2010 at 11:19

The above dialogue is interestng indeed!

I would like to raise another question, namely why have a GDP report at all despite its flaws?

I can only guess that it is needed as gives some measure of where a country, a business etc stand at a certain point of time. You need this information.

However, if different accounting, economic rules etc were used each time, then it would be in breach of the rule of consistency. That would make it worthless altoghether.

Even in its flawed form it serves an essential need for comparing a country's financial performance quarterly etc with other countries etc

It is worthwhile to be reminded of its shortcomings, and Deborah has provided some special facts on its compilation.

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Jeremy Bosk

Oct 31, 2010 at 17:20

David

You have answered your own question. GDP is the best we have and provides a guide which does the job from year to year because major changes in industrial organisation occur over decades. It is only in the longer term that we need be quite so aware of all the caveats.

What really annoys me is the constant sensationalising of figures for one month or one quarter which are going to be revised anyway, and are only significant as part of a longer term trend. Economic and statistical innumeracy in the media adds to public confusion.

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