Download Session 14. Measuring GDP

Module H5 Session 14
Session 14. Measuring GDP
Learning objectives
At the end of this session the students will be able to

explain how GDP is usually measured


distinguish clearly between a benchmark and extrapolated estimates
make estimates of value added using an indicator
Introduction
In this session we study the main techniques that are used to measure GDP.
The challenges of measurement
In most developing countries, making good estimates of GDP annually at national level is a
major challenge, and not merely because of resource constraints within National Statistical
Offices. Annual estimates are usually derived using the production approach, in which the
value added of each kind of activity is assessed at current and at constant prices. However,
it is intrinsically more difficult to measure GDP in countries where formal sector activity is
a relatively small proportion of the total, than it is in developed countries where most
activity is both recorded by accountants and subject to tax.
World Bank estimates suggest agricultural activity (including production for ownconsumption) accounts for one third of GDP in HIPC countries, a negligible amount of
which will be “formal”. Estimates of the extent of other informal activity are not so readily
available. But Charmes1 suggests that in the 1990s non-agricultural informal activity
(excluding imputed rents for owner-occupied dwellings) accounted on average for about a
quarter of GDP in sub-Saharan Africa. When you also include the imputed rents of
owner-occupied dwellings, non-formal activity typically accounts for two-thirds of the
1
Charmes, J (2006) Measurement of the contribution of informal sector/Informal employment to GDP in
developing countries Expert Group on Informal Sector Statistics (Delhi Group)
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economy. Formal activity (including government and taxes on products) accounts for the
remaining third. Thus for two-thirds of the economy, no accounting data are available; so
estimates are based on – what exactly?
Before answering this question we review the main approaches to measuring GDP
The traditional methods…
Traditionally, three main approaches to measuring GDP are referred to. These are the
output (or production) approach, the income approach and the expenditure approach.
The first two of these approaches are closely linked. Theoretically they both aim to
measure the gross value added (GVA) broadly in terms of a business profit and loss
account either from the top down (output) or the bottom up (income). In the output
approach, the value of total output is measured and the cost of inputs (intermediate
consumption) is subtracted to obtain the GVA. This is done at current and at constant
prices, and very often the cost of inputs is assumed to be a given proportion (called the
input-output ratio) of the total output, depending on the kind of activity.
In the income approach, which is only possible at current prices, GVA is basically obtained
by adding the compensation of employees to the gross mixed income or gross
operating surpluses of producers. However the income approach is not really feasible in
a country where most enterprises are informal, because no direct information is available
either on their operating surpluses in total or on how much they are paying their
employees. Even for formal enterprises, the information needed to make direct estimates
of gross operating surplus may not be readily available.
The expenditure approach is completely different. It aims to measure GDP by aggregating
final consumption expenditures (by households, NGOs and government), capital
formation, and exports less imports of goods and services. The problem is that, in
SADC countries, no direct information is available on household expenditure every year, so
it is not normally possible to prepare regular direct estimates of GDP according to the
expenditure approach. The best source of household expenditure data is a household
expenditure survey, but such surveys are not usually conducted every year, in other words
continuously.
In SADC countries therefore, annual estimates of GDP and the activity components are
generally compiled using the production approach. Direct annual estimates are also
available for some of the expenditure components. The “commodity flow” method is
usually used to estimate fixed capital formation. Changes in inventories may not be
covered in full. Final consumption expenditure of households is usually calculated by
subtraction as a residual.
… and an integrated approach
While the traditional approaches may be used to make early estimates for recent years or
quarters, the best approach of all to measuring GDP is to compile a Supply-Use Table
(SUT). An SUT integrates all three traditional approaches in a comprehensive framework,
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usually incorporating a form of input-output matrix. This will be covered in more detail in
a later session, but in essence it involves compiling statistics on both the supply (the first
row of the SNA diagram in session 10) and the demand (the second row) for a detailed list
of products or groups of products.
A key requirement, among others, is detailed information on household final consumption
expenditure. If a household expenditure survey (HES) has been conducted in a particular
year, compilers of GDP could and should compile an SUT and thus a benchmark estimate
of GDP for the year. Thereafter, the SUT could be updated every year, estimating
consumption by commodity flow methods, or by means of more frequent HESs..
Benchmark estimates
This is an extract from international guidelines:
Benchmark compilations
The purpose of the preparation of benchmark estimates is twofold:
(a) They provide the most detailed compilation of the national accounts based on large
representative censuses and surveys, and, as such, the most detailed description of
the structure of an economy;
(b) They form the base year to which the consecutive recurrent annual compilations at
current and constant prices are linked.
The benchmark compilations could be carried out in a long-term cycle with 5- to 10-year
intervals. Rebasing of the base year is [warranted if structural changes occur in relative
prices, behaviour and/or changes in technology]. However, with a normal pace of
economic development, the convention of the preparation of benchmark estimates in a
10-year interval may suffice.
Baseline inquiries supporting the preparation of benchmark estimates for enterprises are
characterized by their infrequent nature in a decennial or quinquennial cycle, and their
comprehensiveness in terms of data items collected and coverage of enterprises across size
(including unincorporated enterprises) and kind of economic activity. Reasoning along
similar lines, a long-term cycle of household inquiries could be adopted consisting of a
long questionnaire form and a more comprehensive geographical representation for the
baseline exercise, interspersed with a short-term cycle of data compilation on households,
using a short questionnaire form and based on a less comprehensive geographical
representation of households. Similarly, administrative records for other sectors, such as
government and financial corporations, may also be examined in more detail for
benchmark periods than for recurrent compilations, not because the data are not available,
but in order to save resources.
Source: United Nations A Systems Approach To National Accounts Compilation §§ 244-246
Discussion point
What is the “normal pace of economic development”? Does it apply in your country?
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Measuring GDP annually (and quarterly)
Users of GDP estimates want to know as quickly as possible after the end of each period
(year or quarter) what GDP was in that period. This requirement for timely estimates
drives the methods that are appropriate for making them, at least in the first instance. This
is the case in every country. Readily available indicators of economic activity (total output)
in each industrial sector or sub-sector are therefore essential in any country. With
appropriate assumptions, the indicators can be used to extrapolate the more soundly based
benchmark estimates of a previous year. Only in rare cases will full accounting data be
available quickly enough to make direct estimates.
The precise methods of extrapolation may vary, although methods that appear to differ
may often lead to the same result. The method is described here involves extrapolating the
benchmark estimates of production using two types of indices derived from the indicators
of total output. These are value indices (for current price estimates) and quantity
indices (for constant price estimates). In most cases, in order to calculate one or other of
these indices, an appropriate price index is needed. For extrapolation purposes, all these
indices would be set equal to 100 in the base year.
There are two main ways of estimating the value indices on an annual (or quarterly) basis,
and three main ways of compiling quantity indices, as follows:
Value indices (for current prices)
1. If estimates of the turnover of all the producers in an industrial sector or sub-sector
are available directly, these can be used as an estimate of total output at current
prices, or converted into an index to extrapolate the benchmark. In general, such
data will not be regularly available for informal production, but for those
enterprises registered as VAT traders monthly estimates could be available from the
Revenue Authority.
2. If turnover estimates are not available directly, a value index can be obtained by
multiplying a quantity index by an appropriate price index.
In each sector this indicator can be used to extrapolate the benchmark GVA. The
assumption is that the input-output ratio remains constant.
Quantity indices (for constant prices)
1. If a value index is available directly (case 1 above), a quantity index can be derived
by dividing the value index by an appropriate price index. (This method should be
used wherever possible, according to the SNA93, but it will not work well in cases
of hyper-inflation.)
2. If estimates of quantities produced are available, they can be converted into an
index number (weighted together if necessary). There is a danger with this method:
if new products are not included, a downward bias can result.
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3. If neither values nor reliable quantities are available, proxy indicators of quantity
may have to be used. For example in some cases the quantity indices are based on
the estimated growth rate of the population of the country.
Again the usual assumption is that the input-output ratio remains fixed, so the indicator
can be applied to the benchmark GVA.
Appropriate price indices
Ideally the price indices used in these calculations will reflect changes in the basic price of
the particular goods or services in question.

For agriculture, the (wholesale, if available) prices in local markets are accepted as
reflecting movements in basic “farm-gate” prices.

For manufacturing activities, producer price indices (PPIs) are the best.

For service activities, specific components of the CPI are often the most
appropriate, since there is usually little difference between the consumer price and
the basic price. In some cases, the all items CPI is the most appropriate available
index.
Typical sources of data for each kind of activity are described in the Annex.
Exercise 1
The table below shows the consumption of cement in Tanzania (obtained by measuring
production, adding imports and subtracting exports. The task is to use these data as an
indicator of modern construction sector output (excluding the building of traditional
dwellings) for estimating the value added of the sub-sector at constant 2001 prices. This
can be done in two steps. First calculate the quantity index. Then use this to extrapolate
the base year 2001 GVA figure of 379 bn TShs. Calculate the annual percentage changes.
Calculation of GVA at constant prices
Year
Cement
consumption
’000 mt
1999
815
2000
808
Quantity
index
2001=100
GVA at
constant
prices
Annual
changes
per cent
%
2001
903
2002
1138
100.0
379
%
%
2003
1318
%
2004
1368
%
2005
1455
%
Source NBS Tanzania
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Annex to Session 14
Indicators of production by kind of activity
For major crops (these may vary from country to country), the source of information is
often administrative: either crop forecasts prepared by the Ministry of Agriculture or postharvest assessments made by agricultural extension staff. Some countries undertake regular
post-harvest surveys. Reliable estimates of minor crops are unlikely to be available (unless
exported), so benchmark estimates may be projected using an indicator such as the total
population.
For crops that end up as exports, often through some (formal sector) processing or
marketing organisation, production estimates will be derived from the external trade data
or from the organisation involved. Informal cross-border trade that escapes Customs
documentation presents a challenge. Only regular surveys at border crossings are likely
capture variations in the quantity of such trade when supply in one country can meet
demand in another.
Measuring livestock production is another difficult area, although not nearly as important
as in value terms as crops. Cattle are frequently seen by their owners as a store of value
rather than as a source of income from slaughtering. Censuses of livestock are rare and
holders (who first have to be identified) are often shy of revealing how many they have.
From time to time vaccination campaigns may provide a handle on the likely numbers, but
rarely would these exercises be country wide. Estimates of the production of meat and
other products are usually based on assumptions about population growth and off-take
rates that may date back several years They may not take account of the effects of drought
or disease. And any revision to the figures may cause a sudden jump in the estimates,
rather than indicating any real trend in productivity.
For forestry, data on logging and the management of public plantations may be obtained
from records kept by the Government Department responsible, but estimates of informal
(or own account) production of fuel – the collection of firewood for household use and its
processing into charcoal – may be only guesses or missing altogether. Information on the
multitude of “other forest products” used by rural households is usually only available from
ad hoc surveys or intermittent Living Standards Measurement Surveys (LSMS) and
estimates are likely to be extrapolated using population growth rates. Similar sources are
used for fresh water fishing. Marine fishing often has a government body that is
responsible for it and so may be able to provide data.
For the mining/petroleum industries, the major companies or the Government
Department responsible (perhaps for monitoring royalty payments) is the usual source.
Informal production is unlikely to be properly covered, especially if exports go unrecorded.
Estimates of manufacturing are very likely to be based on the Index of Industrial
Production (IIP). The IIP is likely to be limited in coverage to the largest enterprises and
may suffer from the problem of not incorporating new enterprises or products (see
Session 5). Assumptions have to be made about the growth of the informal sector.
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Data on production and distribution of electricity and water come from the utility
companies, though this may not included informal or own account activity. Because it is
difficult to obtain reliable data on construction activity, estimates of construction output
are usually based on the supply of construction materials (particularly cement).
For wholesale and retail trade, the total output is not the turnover but the margins
charged on the traded goods, in other words the value of sales minus the cost of
purchasing the goods sold. The usual method is to apply assumed trade margins to the
estimates of imports and of marketed local production. In Francophone countries, use
may be made of the DSF for formal activity, but in this sector most of the value added is
likely to be informal. Road transport is another difficult to measure sector, although
indicators based on vehicle licensing and/or fuel consumption are likely to be better than
nothing. For the remaining services activity (apart from government) the estimates are
likely to be weak, except where there are reasonable indicators available (hotel occupancy,
air-time, school enrolment) or where VAT turnover data exist (for formal activity). These
sources may be supplemented by accounting data from the largest companies involved in
air transport, communication and financial services.
In the case of government activity, total output is computed as intermediate consumption
plus compensation of employees plus (in principle) capital consumption, based on
government accounting data; one or two countries may include rough estimates of capital
consumption.
Input-output ratios
Except where accounting data are available, input-output ratios are mostly assumed to
remain constant from one year to the next. This is a reasonable assumption, at least at
constant prices, where the quantity of output is proportional to the quantity of input, as in
the conversion of grain into flour, although it can be misleading in specific areas such as
agriculture where environmental factors play a big role in determining output. At current
prices, this assumption is less reasonable, but commonly made, for example by using a
single price index for inflating a constant price indicator of value added. The implicit
assumption is that margins are fixed and changes in the price of outputs are determined by
changes in the price of inputs rather than by changes in the level of demand.
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