Fallacious GDP Songs

23 August 2006

Dear friends,  

Once again Thaksin Shinawatara is singing about the strong economic performance of his government, using figures such as GDP, international reserves, debt payment to IMF, etc. to bolster his claims. However, his proclamations are starting to sounding like a broken record.

And every time his government does this, analysts respond, saying these fallacious claims are one-side and falsely attribute the positive figures solely to his government’s effort.

I had been aware of such odd behaviour for some time but began to publicly criticize it in 2005. Then, when I recently saw the government using such tactics again to report national economic figures, I decided to explain how our caretaker Prime Minister arrives at such reports. Specifically, I focus on the government’s boasts that it has facilitated an increase of 2.2 trillion baht in the Thai economy during the last 5 years, that is, a 44.89% increase – from 4.9 to 7.1 trillion baht – between 2001 and 2005.

First, the fallacious figures

When making his assertions, the caretaker Prime Minister always points to officially publicized GDP figures for 2001 and 2005. Indeed, GDP figures for the two years did increase 2.2 trillion baht, or 44.89%, as claimed.

However, to understand these claims, we must better understand GDP. GDP is the value of the goods and services that people in a country produce each year. This figure is used to calculate the size of a nation’s economy and can be measured in 2 ways, as follows.

1.)    Nominal GDP

This type of GDP is calculated by looking at current prices of goods and services. However, Nominal GDP from one year cannot be compared with a Nominal GDP figure for another year because prices change.

2.)    Real GDP

This kind of GDP is a genuine measurement of economic growth or recession. It is calculated by taking current GDP and subtracting increases in the prices of goods and services that have occurred since those in the comparison year. Accurate measurements of GDP also include a deflator, an adjustment made for inflation. At present, the National Economic and Social Development Board releases GDP figures.

Real GDP, as this is called, is a reliable indicator of economic growth or lack thereof. For example, predictions of 4%, 5%, or 6% economic growth are actually Real GDP figures, not Nominal GDP.

Therefore, when the government relies on Nominal GDP to make its boasts, it is being deceitful. Its claims of a 44.89% increase in the economy between 2001 and 2005 are simply not true. In actuality, using Real GDP figures, the economy increased only 834,341 million baht, or 27.73% during those 5 years.

 Table 1: Nominal GDP and Real GDP between 2000-2005 (millions of baht)

* Calculated from Real GDP in 1988 (GDP with deflator)

Source: Bank of Thailand

 Let me give an easy example of how this works. Supposing that many years ago the average Thai salary was 300 baht and a bowl of noodles was 3 baht. Thus, people could buy 100 bowls of noodles with their salary. But if the salary increased to 3,000 baht while a bowl of noodles was 20 baht, people could buy 150 bowls of noodles with their salary. In this case, the salary increased 10 times but the value of the goods or services the salary could buy increased only 0.5 times.

This is how the current government is using Nominal GDP figures. The government only refers to increases in salary but never mentions the decreased buying power that has occurred. This kind of number wrangling is like a magician who uses sleight of hand to deceive the audience. Simply put, the government is mishandling economic figures to cause most people, who have not studied economics, to misunderstand.

Second, the deceptive argument

The government’s claim that it has successfully caused the economy to grow may be partly true, but this is not the whole truth. Actually, the factor causing Thailand’s economy to grow is growth in global economic and trade activities. These factors have contributed largely to the growth of Thai exports.

GDP measurements consider the 5 factors of private sector consumption, investment, government sector expenditure, export levels, and import levels.

From a macro economic perspective, exports are the most significant factor of these 5 factors, accounting for 64-78% of GDP, while government sector expenditures account for only 10-11% of GDP. This means that exports have more influence on GDP than government sector expenditures do.

Moreover, over the last 5 years, Thai exports have grown at the same rate as the world economy and trade, as Table 2 indicates. 

Table 2. Growth of Thai exports and the world economy and trade between 2000 and 2005

Source: Bank of Thailand

 Information recently publicized by the government is incomplete; it is not the whole truth. How could government economists, who would understand these very basic economic concepts well, not object to the prime minister releasing such information? I can find no other reason except that they wanted to reveal such information on purpose, in other words, to mislead the people. In such cases, when the government wants to sing a song, it should be, “I admit. I deceived you on purpose………”

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