WHAT MATTERS MOST: Time to talk
The very serious charge by the Leader of the Opposition that there is a major discrepancy between the measures of nominal and real gross domestic product (GDP) for the Barbados economy in 2010 demands a response from the responsible minister. The response is absolutely necessary because for the numbers to be reconciled, prices in Barbados would have had to have fallen last year, which is an impossibility.
Not too long ago, there was a memorable headline – 0.3% Spurt In Growth – in the Nation newspaper. It was memorable because, used in this sense, a spurt is a sudden burst of economic growth and approximately one-third of one per cent of anything cannot be regarded as a spurt. This may be minor but was intended to have a major effect on the reader. C’est la vie!
In a more technical sense, any figure put in the public domain immediately following the period for which it is intended to describe is truly an estimate and in this case is obviously an estimate. The fact that it is an estimate means that it may be above or below the true figure.
In short, an estimate of 0.3 per cent growth in the economy means that the economy might not have grown at all by the time the true figure is known.
This is exactly why the discrepancy revealed to the public by the Opposition Leader is more than credible in the circumstances and demands a response. The problem in responding comes in having to acknowledge that the institution that is responsible for issuing the estimate for real GDP growth of 0.3 per cent may indeed be wrong.
This is not a problem because, as was stated, it is possible for the true figure to be less than the estimate.
The real problem is that the institution responsible for measuring the GDP in Barbados has apparently found that nominal GDP for the Barbados economy fell in 2010. GDP is a single number that measures the output of the economy.
Since output in the economy includes adding agricultural products, tourism services and hundreds of other products, this is only possible by adding the money value of all the final goods and services. The GDP is therefore the standard measure of output of an economy, and sums up the total money value of the goods and services produced by the residents of a nation during a specified period.
The major problem in using money as a measure of output is that the value of a dollar changes over time. It is therefore possible for GDP to be higher only because prices have risen.
This is not desirable and so to truly compare different years, GDP is adjusted for changes in the average level of prices.
The unadjusted GDP is known as nominal GDP. The price-adjusted GDP is known as real GDP. The real GDP is a better measure because it takes out the inflated prices that make you spend more without getting more goods or services.
In relation to Barbados in 2010, it is being reported that notwithstanding the obviously higher prices, the nominal GDP declined. This is consistent with difficulties reported in the private sector as reflected by the fall in corporation taxes. This is why the private sector has to be congratulated for not laying off workers in even higher numbers.
In addition, once the Government cut its capital spending, the impact on GDP is negative.
On the other hand, investment fell in the economy; imports grew after they fell in 2009 while exports stagnated and the officials admitted that Government attempted to stifle expenditure. These factors all indicate negative effects on GDP.
Therefore the reported fall in nominal GDP in 2010 is highly likely. If this is so, then the reported growth in real GDP in 2010 is impossible unless prices declined. Since prices did not decline, there is a need to respond to the Opposition Leader’s revelation.
The response must come from the minister!