Tuesday, November 27, 2007

Would you buy the GDP?

GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country's standard of living. Critics of using GDP as an economic measure say the statistic does not take into account the underground economy - transactions that are not reported to the government. Others say that GDP is not intended to gauge material well-being, but serves as a measure of a nation's productivity, which is unrelated.

Those arguments always make me feel this is one indicator that can’t be trusted at all. My work life has taken me to some of our Government market intelligence gathering departments and I would put their data collection methods, at best, as archaic. There’s no way that one can vouch the veracity of the data they had collected through dubious means (sending a query card to a few upcountry wholesalers and accepting whatever they fill in) and generating reports on the basis of such data. When these reports form the basis of computing GDP numbers, you know how reliable that could be.

We all know bulk of India’s property transactions go under-reported if not unreported forcing even the Government to acknowledge it. Is the world so short of talented mathematicians, statisticians and economists that they can’t suggest an alternative? I fret because central banks set/reset interest rates on the back of these numbers and put out inflation rates that form the basis for reining in or letting loose money supply, DCF analysis in major M&A deals etc.

Anyone has a better idea…?

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