In times of economic crisis, the mismatch between nominal GDP and real growth will mask real economic conditions.It may not matter whether nominal GDP matches real growth rates in times of economic prosperity, but in times of economic crisis, the mismatch between the two indicators will obscure real economic conditions. Clearly, the current methods of GDP statistics need to be improved.
Recently, the world's major economies have successively announced their economic movements in 2023. According to official figures, China's gross domestic product (GDP) grew by 52% to 12606 trillion yuan, the United States GDP growth of 25%, up to 27$36 trillion. In contrast, Germany fell by 03%。
However, their growth rates do not seem to match the published absolute GDP values. In 2022, the U.S. GDP was 25$46 trillion, at this annual growth rate, why the US GDP in 2023 is not 261 trillion dollars but 27What about $36 trillion?
Germany's GDP in 2022 is 38,768 trillion euros, why, in the case of negative growth, Germany's GDP will expand to 4 in 20231212 trillion euros? Compared to 2022 (12047 trillion yuan) compared to China's GDP growth in 2023 is 559 trillion yuan, this increase is only equivalent to an increase of 46% instead of 52%。If converted to US dollars, China's GDP will even shrink in 2023, although the growth rate is higher than that of the United States and Germany.
Are the statistical offices of these countries mistaken? Actually, no, but it is a matter of GDP statistics.
First of all, the International Monetary Fund (IMF), the World Bank and other global international organizations will uniformly convert the GDP of all member countries into US dollars, and the short-term fluctuation of the exchange rate of the local currency against the US dollar will directly affect the amount of GDP. In 2023, the euro will appreciate against the dollar, the yuan will depreciate, and the euro will appreciate as a result of the European Central Bank's continued interest rate hikes, so Germany's dollar-denominated GDP will easily rise.
More importantly, the GDP calculated and published by the statistical offices of various countries in the world is "nominal GDP denominated in local currency", which includes the price factor. But at the same time, the growth rate they publish is the "real growth rate" excluding the price factor. In March 2023, when explaining to ** why the United States can still widen the GDP gap with China despite low growth rates, Zhao Chenxin, deputy director of China's National Development and Reform Commission, also emphasized this difference.
He pointed out that it is inflation that is much higher than that of China that has excessively pushed up the nominal GDP of the United States. In 2023, this trend continues, with the US Consumer Price Index (CPI) still growing by 34%, which failed to achieve the target of no more than 2% set by the Washington authorities, and the follow-up effects of quantitative easing in previous years are still in place. In the same year, the German CPI even rose by 59%, only 02%, but the head of the German Federal Statistical Office, Ruth Brand, has already warned of Germany's economic stagnation.
High inflation in itself does not equate to economic development. When high inflation occurs, GDP is not primarily driven by growth in real goods, assets, and overall productivity. On the contrary, high inflation is usually caused by stagnation in industrial upgrading, contraction in production, accumulation of debt, and excess liquidity. When these happen, nominal GDP can continue to soar, despite the fact that the economy has materially slipped into recession, accompanied by a decline in the standard of living of residents.
In other economies, the picture is even more exaggerated. Now both Turkey and Argentina are in economic crisis. In 2023, Turkey's inflation rate jumped sharply and approached 65% in December, with nominal GDP growth of 275%, exceeding $1 trillion, but the real growth rate does not exceed 4%. Argentina's inflation rate has soared to 211%, a 30-year high, but Argentina has experienced two consecutive quarters of economic contraction, a sign of a technical recession. In Argentina, demonstrations of high prices, wage arrears and cuts in public spending have erupted, and citizens of the capital, Buenos Aires, have even begun to look for food in their trash cans. Despite this, Argentina's nominal GDP has skyrocketed by 60% since 2020. In 2023, both countries are expected to have a GDP per capita of $13,300, making them "high-income economies" as defined by the World Bank.
At a time when the world economy is still struggling to recover from the pandemic, the Russia-Ukraine war, and other geopolitical disruptions, systemic risks could simmer at any time. It may not matter whether nominal GDP matches real growth rates in times of economic prosperity, but in times of economic crisis, the mismatch between the two indicators will obscure real economic conditions. Clearly, the current methods of GDP statistics need to be improved.
First, how to reduce the impact of exchange rate fluctuations? Speaking of which, it's easy to think of GDP measured in purchasing power parity, a common alternative to dollar-denominated nominal GDP. Based on the law of one price (if there are no transaction costs and barriers, the price of any particular commodity should be the same in every location), PPP excludes exchange rate factors by simply adding a given basket of goods in each economy. However, the quality of a "basket of goods" varies so much that it is almost impossible to ignore the transaction costs or barriers involved, which means that it is difficult to match the reality of any particular commodity in the basket. In addition, exchange rates also reflect the competitiveness and economic development expectations of the country to some extent, and most cross-border transactions are based on real-time exchange rates**. Therefore, we cannot rely solely on GDP in PPP terms, and we may have to find a middle between nominal GDP in US dollars and GDP in PPP.
Then, how to reduce the impact of inflationary factors? In my opinion, this can be achieved with a GDP deflator, which measures the overall performance of all goods and services created by an economy.
According to the formula, the GDP deflator is 100 for nominal GDP and real for GDP. In fact, the IMF's World Economic Outlook database provides the annual GDP deflator for most member countries, but does not publish their actual GDP and has to calculate it on its own. According to this algorithm, as Turkey's deflator has exceeded 1000, Argentina has soared to 24709 as if it were out of control5. The real GDP per capita of the two countries will shrink to at least one-tenth of the original amount, which is a true reflection of the current economic situation of the two countries.
Of course, these steps are only preliminary and there are many details that need to be perfected. But the general direction of improvement should be clear: how to make GDP as true as possible to the economic situation of countries, especially those in deep economic crisis, rather than creating the illusion of superficial prosperity.
The author is a Ph.D. student at the School of Politics and International Relations at Lanzhou University.