Thursday, March 29, 2012

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:


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


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


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.

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