March 27, 2012 12:00pm by David Farrar

Measuring GDP

Damien Grant in the HoS, wrote about a recent paper by Reserve Bank Governor Allan Bollard on measuring GDP. I hunted down the paper, which is here. Basically it details the differences between how NZ and Australia measure GDP, and that if we measure GDP like Australia does, then the gap would be only 20%, not 30%. This is roughly what the purchasing power difference is.

This doesn’t mean we actually get any richer by changing how we measure GDP, but that how we place on the global league tables would be a fairer reflection.

Bollard states some key differences are:

  1. According to the report and a survey of country practices, of the 45 countries surveyed, New Zealand and Japan were the only countries that made no explicit estimates of unobserved activities (such as cash jobs, growing your own vegetables, illegal activities) in the estimation of GDP. Taking Australia as a benchmark, where explicit estimates are not made for illegal activity, but are made for the underground economy and household backyard production, we believe GDP in New Zealand could be underestimated by 2 percent.
  2. Most countries treat Financial Intermediation Services Indirectly Measured in a way that increases GDP by allocating the service to the sector that uses or consumes it. In New Zealand all financial services are assumed to be used by businesses in the production of other goods and services.We estimate the impact of this at approximately 2 percent of GDP.
  3. The lack of quality adjustment of residential buildings leads to an understatement of GDP. If we assume a similar growth path to Australia for New Zealand, we estimate the approximate ballpark for GDP could be 1.5 percent higher.
  4. Statistics NZ plan to introduce SNA 2008 in 2013-14. This is similar timing to other countries around the world. It is difficult to estimate the impact that new international standards will have on New Zealand’s national accounts and GDP. We estimate approximately a 3 percent increase in GDP.
  5. A country’s GDP can be estimated three ways, using the production method, the income method, or the expenditure method. In Australia, all three GDP measures are available on a quarterly basis, and instead of elevating one measure over another, the quarterly GDP movement is calculated by averaging the movements of the three measures.

Bollard concludes that our actual position on the OECD league table would jump us over Korea, Spain, Italy to around Japan’s place, if we measured GDP like Australia does. He argues that reducing measurement differences is important because:

  • Households may not make optimal decisions regarding employment, training, migration, saving and investment if they believe that our GDP per capita is significantly lower than it actually is, and that they might be better off elsewhere.
  • Financial markets need accurate measures of New Zealand’s ability to borrow and repay debt. This impacts our financial institutions and our sovereign borrowing. Measuring New Zealand’s GDP properly is a key concern of credit rating agencies.
  • We need well-focused informed economic and social policy. Clearly it is more difficult to know whether these are working if there are doubts about the level of GDP per capita, and whether our measure is truly comparable with that of other countries, including that of our large trans-Tasman neighbour.

And he concludes:

New Zealanders rightly worry about the extent to which New Zealand incomes have drifted below the world’s highest in the last 40 years, but how large is that drift, and how have the gaps changed in more recent times? For helping answer those questions, good and economically comparable data are vital. This paper does not answer the question “are we closing the trans-Tasman gap”? However it does argue that the gap is not as wide as most people think.

At the 2012 annual leader’s meeting, the Prime Ministers of Australia and New Zealand agreed that, to promote further reform and economic integration, the Productivity Commissions of each country would conduct a joint study on the options for further reforms that would enhance increased economic integration and improve economic outcomes. Given this aim, a useful contribution could be to improve harmonisation of statistical measurement in Australia and New Zealand, where appropriate, to improve data comparability.

I had no idea that the measurement differences between countries were so great that they could make a difference of 10% of GDP.