Part 1 of 3
Transparency in governance has been identified as one of the priorities of the new Government.
In economic governance, transparency requires the use of timely data, beginning with data that can be generated from economic accounts. In this series of three articles, we will review the essential uses of mainstream economic accounts to policymakers as well as business managers.
These articles are also meant to help build appreciation and support in the community for the development of statistics in the Cayman Islands.
A system of national economic accounts serves policymakers in a manner similar to how typical accounting reports inform business managers.
An accounting system that is developed and maintained according to general accounting practices is a backbone of any business enterprise’s good financial management practice.
Accounting reports allows managers to monitor an enterprise’s financial performance at any given time, and provides essential and objective information necessary for making business decisions
A system of economic accounts which is formally called System of National Accounts compiles and presents information about the country’s economic performance.
When developed according to acceptable international (United Nations) standards, this can become an objective basis for decision-making in government, such as when to increase or decrease government spending to stabilise economic growth or prevent economic over-heating. In many countries, an SNA has become a central part of the standard toolkit for macro-economic management.
Statistics from the SNA also have valuable uses to business planners and managers, as they provide key indicators for business or investment planning such as purchasing power, and economic growth opportunities.
A SNA consists of three major accounts: a) production and income accounts which are accounts of the value of production and the distribution of income in the economy; b) the accumulation accounts which detail the acquisition and disposal of financial and non-financial assets and liabilities; and c) the balance sheet which records the values of the stocks of assets and liabilities that are held at the beginning and end of the period.
The articles in this series focus on the first component of SNA – the production and income accounts. The series is organized into three articles which highlight three fundamental purposes for developing these accounts:
Part 1
Economic valuation of the country’s production of services and goods.
Part 2
Measuring the contribution and growth of economic sectors
Part 3
Measuring the economic contribution of Caymanian workers and business owners
Parts 2 and 3 will be discussed in the next two weeks.
The market value of all final goods and services produced in the economy in a given period is the most basic economic information that economic managers and policymakers should readily have. The account corresponding to this valuation is the gross domestic product.
The growth rate of GDP is the standard barometer of a country’s economic growth performance, particularly in the context of a time series or trend, or in comparison with other countries.
GDP is usually measured annually although most countries now estimate and report this on a quarterly basis. An important example of the use of quarterly GDP growth is in the technical definition of economic recession – as a rule of thumb, analysts declare an economy to be in recession after posting two consecutive quarters of negative GDP growth.
Estimation approaches. There are three methods for estimating GDP: a) by summing up the gross value added of all production sectors in the economy (agriculture, industry and the service sectors); or b) by adding up the incomes of labour and owners of equity or capital; or c) by summing up all expenditures in the economy. Each of these yields consistent GDP estimates but they also provide different sets of other economic information that are useful for policy-makers and business planners. This will be discussed further in Part 2 of this series.
Essential uses to policymakers
There are at least three main uses of GDP statistics for decision-making: in fiscal policy, in long-term economic planning, and in evaluating the impact of policies or projects and programs.
The mainstream practice in macroeconomic management is that fiscal policy – i.e., the decision on whether the overall fiscal balance should be in surplus or otherwise, and to what degree – should be evaluated and recommended based on the country’s economic growth prospect.
Fiscal policy is often prescribed to ‘stabilise economic growth’ i.e., it is used to support economic growth in a manner that avoids over-heating the economy.
The orthodox model for fiscal policy is that this should be used counter-cyclically: fiscal policy should be conservative in good times and should be otherwise in bad times. Technically, fiscal policy should aim for surpluses in times of economic growth but this can be relaxed during an economic downtrend. Some countries, for example, would incur deficits when their GDP growth is expected to slow down due to shocks hitting the economy.
The quality of the underlying national income accounts used in estimating the GDP and GDP growth forecasts is thus critical in formulating fiscal policy.
It is for this reason, among others, that UN standards for the estimation of economic accounts have been developed, and that the top multilateral agencies (the IMF and the World Bank), rating agencies and investment analysts closely monitor world and country GDP growth data.
Another high-level use of GDP statistics to policymakers is in the area of long-term planning. One of the objectives of long-term economic planning is to ensure the sustainability of economic growth. A country’s economic growth is thought to be sustainable over the long-term if this is achieved mainly by raising the productivity of workers rather than from mere increases in the workforce. Simple statistics like GDP per worker are thus commonly analyzed to evaluate the sustainability of economic growth; econometric analyses are also performed in generating the appropriate policies that can help bring about productivity growth.
GDP statistics are also useful in evaluating the overall impact of government policies or projects and programs. Estimating a project’s direct and indirect contribution to GDP can enhance the objectivity, transparency and efficiency of public investment or policy choices.
This may be done using static models (by applying for example, consumption multipliers or by using input-output matrices) or general equilibrium models. The GDP impact of projects can then be used as a criterion for prioritizing government projects, especially during periods when fiscal policy is used to stimulate economic recovery.
Essential uses to business managers
GDP growth forecasts are popular indicators of overall economic prospects. For example, it is common practice for stock exchange players, fund managers and business planners to examine or adjusts their own market forecasts based on announcements of the latest US GDP data. For foreign investors, comparison of historical GDP growth across countries is among the baseline dataset for choosing an investment location.
A related account is GDP per capita which is simply GDP divided by the country’s total population. For businesses managers or investors, this is commonly used as a basic indicator of the ‘purchasing power’ of the local market. For businesses engaged in so-called ‘luxury’ markets – those with goods and services with very high income elasticity of demand – another useful indicator is the growth rate of GDP per capita. For example, an acceleration of GDP per capita, along with higher population, bodes well for the luxury goods and services market. Other useful indicators for business planning can be derived from the 3 approaches to estimating GDP which are discussed in Part 2.
Maria Zingapan has an M.A. in Economics, and is currently a Manager at Deloitte’s Economic and Business Consulting services. She specialises in macroeconomics, economic development planning and policy research.
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