Mariya’s Repko Review of “What is Wrong with the Calculation of GDP in Ukraine?”

Comments of economists on the methods of calculating GDP

Author:

Mariya Repko commented Tetyana Tyshchuk’s article “Schrödinger’s GDP: What is Wrong with the Calculation of GDP in Ukraine?”

The figure of UAH 600 billion, presented as a discrepancy between two methods of calculating GDP, is astonishing — this is about a quarter of the economy. If it turns out that the statistical data may contain discrepancies like this in such an important indicator as economic value added, then almost any other statistical indicator can be called into doubt.

Inside the country, GDP is the basis for estimating and calculating the state budget, as well as making political decisions in the economic sphere. For external partners, GDP, GDP growth, and GDP per capita are key indicators of the country’s investment potential, living standards, economic conditions, and even geopolitical opportunities. This is true for the IMF and the World Bank, as well as for rating agencies and foreign investors.

Answer to the question how exactly the revision of GDP can influence payments on the GDP warrants, issued by Ukraine during restructuring of its sovereign debt, lies within the legal framework. The prospectus to issue securities says that owners of the warrants don’t have the right to dispute Ukraine’s methodology for calculating GDP or demand recalculation of payments after the revision. But such a large-scale revision may cause loss of confidence in the issuer. In any case, this will bring GDP closer to the barrier of $125.4 billion, after which, and when other conditions occur, payments can begin.

Realising the depth of the problem that Ukraine may face if the author’s calculations will be confirmed or won’t be refuted, we are eagerly awaiting an official response of the State Statistics Service of Ukraine and a reaction from the Ministry of Finance and the Ministry of Economic Development and Trade.

Yuriy Gorodnichenko’s Comments

Economic statistics are key ingredients for sound policy-making and Gross Domestic Product (GDP) is the king of economic indicators. Indeed, nearly all decisions at the macroeconomic level are based on GDP and its derivatives. Should the central bank raise interest rates? Should the government implement fiscal stimulus? How is the welfare at the aggregate level changing? Answers to all these key questions require a well-measured GDP.

Given the central role of GDP for policymaking, it is vital to have high-quality measures of GDP. Yet, measurement of GDP is fraught with a number of challenges, with a large size of the shadow economy being perhaps the most important factor. In this environment, it is inevitable that various approaches to calculate GDP can disagree and, perhaps not surprisingly, the disagreement can be substantial. However, a framework used to compute GDP should be internally and externally consistent so that in case there is a discrepancy across different methods there is a simple and intuitive way to rationalize the discrepancy. Is it so in the Ukrainian statistics?

Measurement of GDP is fraught with a number of challenges, with a large size of the shadow economy being perhaps the most important factor. In this environment, it is inevitable that various approaches to calculate GDP can disagree and, perhaps not surprisingly, the disagreement can be substantial.

Dr. Tetyana Tyshchuk does a series of checks to answer this question. Specifically, she examines whether a measure of value added based on a method that presumably should include shadow economy (the difference between gross output and intermediate consumption) is greater than a measure of value added based on method that presumably excludes shadow economy (sum of value added across firms). This is a straightforward check but she shows that the current value added statistics in Ukraine fails to pass it. Furthermore, the difference is staggering. If for a typical European country the ratio the narrow measure to the broad measure is somewhat less than one (and much less than one for countries with a large shadow economy sector), in Ukraine the ratio is close to two! Clearly, something does not add up in the national income and business statistics of Ukraine. Why does the statistical office of Ukraine have such major inconsistency? This is an open question but thanks for Dr. Tyshchuk’s important and timely work we know that we should re-examine the methods of collecting data and calculating GDP in Ukraine. This is a matter of utmost urgency for Ukraine’s statistical office.


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