GERD to GDP and GERD / Gross International Product

Sometime ago I wrote in this blog suggesting that we need to be aware of the weaknesses of share of GDP as an indicator (whether it be for RandD or sectors) even though it is widely used in international studies.

There appear to be three primary circumstances where percentage of GDP is used as an indicator.

1. A through time measure of activity in a single country;
2. A cross country measure for a single point in time - this is an indicator of relative intensiveness; and
3. A cross country measure for a time period.

Of these three usages the first is completely legitimate, the second is mostly legitimate (although it should not be used alone) and the third I argue is highly misleading because of the differential growth rates of countries. #3 has some value but it is highly limited and needs to compared with a new indicator - which I have argued should be a panel GDP set. A country that grows rapidly will have a very hard time keeping RandD static let alone growing. Conversely, a country that has static GDP my find itself with constant or growing GERD?GDP.

The OECD amongst others continues to analyse a number of economic activities using the third approach. Here I want to highlight its use with RandD and show how much it changes the perspective if a different measure is created. For an example of the OECD use of the measure of RandD/GDP through time go here and watch the little movie.

In this blog I want to illustrate how I have gone about creating a panel dataset and how it can be used.

The criteria for a panel dataset are:
1. Long time series
2. High quality of data
3. Relevance (comparative GDP is log scaled so many small countries contribute little to the overall scale of a Panel GDP set)

Dating back as far as 1970, organisations such as the OECD have collected high quality GDP data for numerous countries. The number of countries to be included in the basket is somewhat arbitrary but for reasons of breadth of geographic coverage it seemed to me that the top 15 in 1970 provided a practical solution. This GDP G15 better reflects the advanced economy world of the last 40 years but lacks the BRIICS. The indicator could be named by various titles such as Benchmark International Product (BIP) or Gross International Benchmark Product (GIBP) but I think the simplest is Gross International Product (GIP)

The countries I have included are:

Australia

Belgium

Canada

France

Germany

Italy

Japan

Korea

Mexico

Netherlands

Spain

Switzerland

Turkey

UK

USA

GDP Dynamics

The first step is to understand GDP dynamics across a serious slice of time.
This first graph depicts in current $ PPP the pattern of GDP growth and relative scales (log).

Obviously, the USA is the largest economy with Japan second. But within this graph other patterns such as the rapid rise of Korea and Turkey are noticeable. The flattening out of Japan is also noticeable.

If this is converted to an image of proportions more interesting patterns emerge.

The USA is essentially steady in its share, while Japan and a number of the European countries loose share of GIP. Countries like Korea make up the difference and even Australia grows within the
panel.

GERD/GDP

So then we come to the classic RandD/GDP analysis. This is GERD data with Austria added in for GDP comparisons purposes.

It quickly becomes obvious that most countries have grown their GERD / GDP ratios. But then the question becomes how meaningful is this when we know that countries like Germany and Japan in particular have not been growing as fast as other countries in our panel set. For that analysis we turn to GERD/GIP

GERD/GIP

The image becomes very different when we account for different growth rates using our Panel set.

Now the GDP performance shines through. Japan through the 1990s had a falling share of GERD?GIP, Many European countries had fairly flat performance in the 1990s and 2000s

Though they are small, it is the small to medium economies - Austria, Canada, Australia, and Spain that do well.

So what you measures matters.



The advantages of a panel set (Gross International Product)

1. A panel set allows all countries to be compared on exactly the same basis.
2. the trend up and down are more persuasive because the growth or stagnation of individual economies is removed
3. it is possible to create groups of countries because the panel set is so much larger than any single economy.
4. Any number of countries can be analysed using the Gross International Product as the concept of 100% of GIP is essentially meaningless. If for example it was desired to look at BRIIC activity of a particular kind and together it exceeded GIP, that would not be a problem because of the way the measure works.



The Disadvantages
1. Scale becomes a more obvious factor - larger economies will look bigger on the graph. Thus, there is still some place for the tradition GDP measure but as is obvious it does not reveal the complete story.

China's lack of innovativeness

China's success is remarkable and where it has genuinely been innovative, those successes need to be celebrated and have been across the web.

However, where the change is less than good then that needs to be pointed out as well. The planet simply has too few resoucres to waste where that be in Canada with the consumer or highway culture or in China with empty real estate.

http://www.sbs.com.au/dateline/story/watch/id/601007/n/China-s-Ghost-Cities

The technology of economics

In my recent previous posts I have begun to work through the idea that economics as we currently have it is a technology. Curiously, I had to laugh when a recent TED talk featured Niall Ferguson talking about "The 6 killer apps of prosperity". The means of communicating the idea of the institutions critical to a modern economy was to call then apps - ie a technology. It is worth watching.
http://www.ted.com/talks/niall_ferguson_the_6_killer_apps_of_prosperity.html


But the one for me that is real eye opener was this TED talk on algorithms. This is absolutely worth watching.

There is no economy just technology II

Yesterday, I wrote that there is no economy just technology. Now this is obviously an exaggeration but I think I have hit on a point worth making.

From early in our lives we hear people talking about 'the economy'. We can start studying economics at high school and at university we can choose between an economics faculty, political economy or business - but there is no faculty for the study of technology.

It is natural for us to think in that the domain structure of social life is the economy and technology is a piece of machinery within that. However, let us revisit that assumption. The classical economists did not not even include technology. Their production function was land, labour and capital. More recently we have added technology but this is not technically true.

The expression should be: Labour (expressed through a particular techno system) * Land (the environment utilised for and with a particular techno system) * Capital (this itself is a techno system of its own). Now economic rules still have a role in our lives. Some industries grow and some decline etc.

But which comes first the 'economy' of a particular industry or is it the technological system.

Take an example - we now have an 'oil economy' but 150 years ago we didn't. We had a need for transport - humans have always looked for ways of moving more easily. Then multiple technologies came together: the ability to process oil, the internal combustion engine, the construction of a frame around the internal engine and the new forms of organisation that enabled the capturing of enough capital to mine the oil, transform the oil, ship the oil, build the vehicles, build the roads, build millions of oil distribution centres.

There is structure and an element of self organisation but it is all technology. And it doesn't matter whether you want to discuss the modern 'economy' or the salt based economies of ancient civilisations.

Keith Smith in his paper on knowledge based economies makes the following point:

Paleolithic and Neolithic was by any standards knowledge-based, and paleoanthropologists have demonstrated the existence of apparently well-formed bodies of knowledge with respect to animal behaviour, pyrotechnology, material, mining, symbolic communication, the aerodynamic properties of weapons, cosmology and even medicine in these societies. 

In which case what comes first the ability to modify our environment or the economy around those modifications.

Maybe it is time to get serious about the study of technology and stop seeing it as engineering or science or economics or business. It is the defining feature of human society. As humans we create technologies and those technologies shape us.

There is no economy just technology

I have finally got around to beginning to read Brian Arthur's "The Nature of Technology". This has been on my to do list for awhile but I am finally getting there and I have to say it looks quite promising at this stage. I like the style and the layout of the ideas.

But there was a sentence on page 1 - in the preface that really got me thinking. I have been pondering the nature of technology for awhile now myself. It is a fun topic and one that I need to work on for a particular project but I can't say it has been terribly fruitful so far. anyway this sentence got me thinking...

Anyay here is the first sentence....
"It was clear to me that the economy was in no small part generated from its technologies"

Well that wasn't a big insight - anybody who studies the economics of technology can figure that one out. It is the essence of the neo-Schumpeterian school which Keith Pavitt and Chris Freeman started in the early 1970s at SPRU. But it is the next sentence that really caught my eye...

"After all, in a sense an economy was nothing more than the clever organization of technologies to provide what we need". 

Now this caught my eye. It got me thinking if this were true then we sould actually invert the concepts.

In classical economics, an economy consisted of only land, labour and capital as technology was exogenous. Later work by Brian Arthur himself with others has help to make technology endogenous to the economy. But given the sentence above actually the economy is actually only a subsystem of technology.

It is possible to argue there are three integrated systems on earth. There is the environment which could tick along without us. There is us - humans - what is very recently been called the Anthropocene and then there is our technology.

Land (as opposed to the environment) and labour or human capital (as opposed to society/humanity) only exist in relation to particular technologies. Capital is actually a form of technology in itself.
And the economy - well it changes and morfs with technology.

So logically there is no economy - there is technological development and within that land, labour, capital, and the human organsation of those activities - which we call the economy). Well ok to say there is no economy is pushing it - but the economy becomes a subset of technology not the other way around.

The point is technology can not be reduced to mere hard objects and tools. As Lipsey reveals that quickly runs into problems so he includes organisational systems and  process technologies.

So just to make the point...

Land - rare earth minerals are dirt with a use (a thing they can be used in), a way of processing them and a way of transporting them.

Okay so you might argue that that is a modern example. Here is one from the first nations people of British Columbia who used to trade along the east coast of North America. They could use cedar trees (requiring a device to carve the timber), to form boxes by bending a single piece of timber. Pretty smart technology. They would trade their wares travelling by canoe at least the entire cast of what is now Bitish Columbia.

Labour - clearly labour only has meaning in relation to set of interdependent technology systems that it is performed within.

So perhaps instead of using the word economy to discuss the dynamics of a particular period of history including our own we should start using a word like hmmm techno....

Understanding the context for innovation policy

Across many years of research on science, technology and innovation policy and indicators, I have often felt that that there is a lack of holistic approach to mapping policy and metrics. I have addressed this in various bits of writing including the conference paper written with Susan Cozzens a few years ago called ‘knowledge ecologies’. I haven’t developed it for publication because I am not sure that I yet have the language to express the ideas embedded in that paper.

Most of the work on policy appears to assume particular ecomic contexts and studies do not directly link policy mixes with the economy.

As I have written elsewhere in this blog, the idea for my econscape graphs http://econscapes.blogspot.com/2009/10/econscapes.html came to me in the early 1990s but they are somewhat problematic entities. They are brilliant for communicating to a certain audience that every country has its own economic structure fingerprint. This would make a lovely colour picture book someday but the graphs are difficult in and of themselves to do much with because:

1.       The charts themselves do not help to address a particular research questions for academic publication – that is better suited to the standard I-O economic analysis methods;

2.       They are better suited for policy development – but the question is how to use them.

Then about a year ago or so an idea occurred to me (in Church funnily enough) on how to push this further.

Section 1: Explaining the Matrix

In the paper I wrote with colleagues from the OECD (Yamano and Webb) we included the following diagram. It is a standard input-output framework diagram.

The Basic Structure of an Input-Output Table

Wixted et.al. 2006.

If we focus just on the domestic intermediate matrix, then we could divide the economy into 4 main components which turns into 16 (4X4) interacting blocks of activity.

1.       Resource base activities (mining and agriculture)
2.       Manufacturing
3.       Services
4.       Government and non-profit sector

------------------------------------------------------------------------------------------------------------------ Technical note discussion – please read. In the intermediate matrix above the interaction of the first [demand] column (agriculture) and the first [supply] row agriculture appears in the top left. If you turn this into a graph visually much detail is lost because the eye is looking down the most important section of data – the diagonal as the largest interactions have always been intra-industry. The econscape images are therefore rotated 90o so that the interaction just noted appears in the bottom left. If the matrix is going to be used in conjunction with the econscape image then I recommend rotating the matrix as well, otherwise it is probably best to align it with the traditional I-O configuration.  ---------------------------------------------------------------------------------------------------------------

As a first cut of a policy and metrics we can cut up the domestic intermediate matrix into 16 significant quadrants.

Stage 1:                Filling in the matrix

Stage 2: Name the matrix sectors

Stage 3: Overlay the matrix on an econscape (this time Australia)

This can be done for any economy where a symmetric domestic industry X industry transactions matrix is available. Develop the econscape, this time for Australia.

Then overlay the matrix – suitably rotated for the orientation chosen for the econscape.

From this we can observe the Australian economy is heavily concentrated in the services and resource based segments of the economy

Section 2: Implications for innovation metrics

Typically STI indicators and policy have emphasised the segment F (mfg * mfg). However, in this example we can see it is important that indicators be concentrated in the resource and services segments.  But this is not straightforward.

Section 3: Implications for innovation policy

In recent decades there has been increasingly emphasis on innovation in the services sector but resource sector based innovation is a real problem for many economies, policy makers and academics. For too long it has been ignorned as old economy and not ‘knowledge based’, but this is not the case Australia and Canada. We need to start looking at economies in all their complexities.

Section 4: Cautions

The one caution that needs to be made regarding this approach is that despite the fact that the data is based on industry interdependencies the data can not convey where the economy’s true value lies.

Resource sectors for example earn vast revenues from exports typically which then re-enters the economy in the service sector. This is what I refer to worm-holes in the economy. The data doesn’t necessarily highlight connections but case studies do make them clear.

 © Brian Wixted.

The structural differences between the USA, Europe and Asia

There is much written these days about the big economies of America, 'Europe' and China, and the differences between them.

What is curious about this is that I haven't found anybody who has taken the time to actually visualise the differences.

This can be done a couple of ways and I will hopefully do both over coming weeks. The first would be to look at the differences in production co-efficients ( the ratios of inputs to make a $ of output). Alternatively, you can visualise the intermediate goods matrix. To do the latter I suggest the folowing.

1. I think you need to first develop a panel GDP set for both time series analysis and for international analyses so that the comparisons are actually on a dollar for dollar basis. It is most common to use national GDP as the denominator for comparisons but I think we should be doing better that than.
I made the argument here for panel GDP analysis http://econscapes.blogspot.com/2009/11/constant-prices-or-share-of-gdp-or.html . In a future blog I'll some international R&D analysis that I have developed to compare GDP with Panel GDP.


2. I have created an OECD GDP Panel dataset for fifteen countries starting in 1970.

3. So that done you can visualise the economies using the landscape chart format that I have explained previously in this blog. http://econscapes.blogspot.com/2009/10/econscapes.html
The data comes from the OECD input-output database for 2005 and the categories on both axis are simply those from the I-O inter-industry matrix (i.e. not the value  added of final demand sectors).

Click on the images below to enlargen.

1. The USA 2005.

What we see from this image is that the US economy's interdependencies are heavy weighted to the services sector.

The super tall peak is the interaction of the supplier industry 'Finance and insurance' and the demand industry of 'Finance and insurance' . In I-O economics it is most common that the intra-industry interactions are the largest.


2. Europe 2005.

We see that Europe (all the EU countries in the database) is also heavily weighted to the services sector. Now this image is not as accurate as it is constructed from the sum of domestic tables. It thus leaves out cross border but intra-european trade - which will favour manufacturing interactions. In future I'll post historical analysis of Europe that is more accurate as I have international input-output matrices for 1970, 1990 and 2000. For anything later than that will wait on the work of the European funded WIOD group.

3. Asia.

For the Asian countries (China, Japan, Korea, Indonesia and Taiwan) the same problem as applies to the Europe chart apply. It nevertheless emphasises the huge structural differences between the economies of America, Europe and Asia. Asia is heavily concentrated on manufacturing.

So, despite the inaccuracies, these charts provide a very interesting insight, though rough approximations of the relational structure of these three 'economies'.

The big discussion point out of these charts is that they reinforce the perception that services are based in the west and manufacturing in Asia.