Whither GDP

The initial furore about drastic revisions in India’s GDP which triggered my piece in Mint earlier this year requires follow-up.  Two news items in the Western Media caught my eye recently. The first is an assessment report by the Boston Consulting Group (here) and the second an inaugural report from the newly created JPMorgan Chase Institute (here). Both these reports are amibitous in scope, reflecting the need to go beyond a headline number such as GDP in understanding the general well being of an economy and its citizens.

BCG titles its effort, Sustainable Economic Development Assessment (SEDA) and proposes three main elements: a) economics which of course measures how well policies create the economic climate for efficient resource allocation and innovation; b) investment in human capital and infrastructure;  and  c) environmental protections and inclusiveness. Standard measures currently in use largely reflect the first and somewhat the second. Even in these measures, there are glaring holes- the treatment of intellectual property, and of research and development expenses. Deemed largely as intermediate outputs, these innovative contributions are poorly captured in the “final” sales numbers that GDP is based upon. The Chase Institute takes a different tack at exploring the interconnections in economic activity. Rather than look at trends in macro-economic data which has been the approach of generations of economist, the Institute looks at finer information- namely, the proprietary transactions data of nearly 2.5 million bank account holders. From this big data analysis, they are better able to understand their income and consumption patterns. Their 3 main findings are striking: a) across all income spectrums, account holders experienced high volatility in income and even higher volatility in consumption; b) changes in income and changes in consumption do not move together, exhibiting only a small positive correlation and; c) typical account holders do not have a financial buffer to withstand the volatities reported above in both income and consumption. Again, the message is clear– looking at one headline number like the GDP does not provide a perspective on how messy and volatile financial lives actually are!

I think that in India as well, overwhelming reliance on small sample surveys and then on the law of large numbers appears increasingly to be misguided. Let big data show the way!

 

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