Latest / Eh Sayers / GDP Explained Without Putting You to Sleep (We Promise!)
Transcript
- Max: Welcome to Eh Sayers!, a podcast by Statistics Canada, where we meet the people behind the data, and explore the stories behind the numbers. I’m your host, Max Zimmerman. If you flip on the news, read the business section or hear politicians sparring about Canada's economy, there's one thing that always seems to get brought up: the GDP or Gross Domestic Product. But, I didn’t realize just how much the GDP affected me personally until recently when I became a first-time home buyer. This is when I learned that the interest rate that I will be paying on my mortgage for the next 5 years is influenced by, you guessed it, the GDP. I wanted to know more... What other aspects of my life are so closely intertwined with Canada's GDP numbers? I had to talk to someone here at Statistics Canada that knows what they're talking about. Amanda: Hi, my name is Amanda Sinclair and I'm an assistant director for the National Economic Accounts at Statistics Canada. Max: So I know that economists here at StatCan and have a preferred method of measuring the economy. Can you tell us what that method is and how it's measured? Amanda: Yeah. Gross domestic product, I would say is the key measure of our economy’s size, performance, and general health. And it measures the final value of all the goods and services that we produce in Canada in a given period of time. That could be a quarter or a year. There are three ways to measure GDP. The first is the production or value-added approach where we estimate the total value of all the goods and services produced, and we subtract out the inputs of the cost of the inputs to produce those things. So for an example, a bakery producing bread, we measure the value that they sell that bread for to final consumers. And we take out all of the inputs, like the flour and the sugar, even the electricity to run the bakery. We subtract that out and that gives us an indicator of the value added. The second approach to measuring GDP is the income approach, and for this one, we estimate all of the incomes that accrue from producing goods and services. So for example, with the bakery example, there would be employees who would be earning wages from producing or baking that that bread. There would also be the business owner who would get a return, and governments can also earn income from production. The main example here being that there’s GST or sales tax charged when goods are sold. The final approach is called the expenditure approach. And here we add up all of the final consumption that takes place in a given period. This could be households, purchasing goods and services for their own consumption, governments also buy goods and services, businesses could be investing in capital assets, or we could sell our goods and services to other countries in the form of exports. And when we do exports, we actually do it on a net basis to remove imports. So it's exports minus imports. But these three ways allow us to measure the overall size and performance of the economy in a given period. And it really is a strength of our system here in Canada that we, on a quarterly and annual basis, we do all three approaches. So we're not just relying on one set of data, we do all three ways, and then they're reconciled in order to provide a coherent, consistent picture of what's going on in our economy. Max: So we're measuring productivity with the GDP, and if I as a worker become more productive as time goes on, what difference does that make in my life? Because it's easy to see how, if I'm more productive, that’s beneficial to my agency or my company. But how does that actually benefit me in the long run? If I take your example of the bakery, let’s say… If I’m a baker and some revolutionary technology, machinery comes around that allows me to make dough at a way faster rate or something like that… I can easily see how that would benefit the bakery. The bakery is going to make more money, and that in turn is going to, you know, increase the GDP, the value added that the bakery can add to the economy. So that’s good for the bakery, it’s good for the economy. How is it actually good for the baker, the worker themselves? Amanda: Yeah. So yeah, you're talking about labor productivity. It's another key, economic indicator of evaluating how our economy is performing. It's an indicator of the efficiency. And so, as you indicated, if people can produce more output with the same or less amount of time, they would be considered more productive, more efficient. And generally there's a close relationship between labor productivity and real wages. So as those employees can produce the same amount of output for their company with the same amount of input—so the same amount of hours worked—generally, there's an incentive there to have real wages increase. So the company could therefore turn around and provide wage increases to those employees, which would then benefit their cost of living and living standards. So productivity is tightly correlated with supporting rising standards of living. Max: I'm curious about some of the limitations of the GDP. If the GDP is strong for a country, does that mean everything is good? Or if it's bad, does that mean that everything is going badly? Like how do we make sense of that? Amanda: GDP is a great economic tool to understand how the economy is performing. However, it is an aggregate picture of what's going on, and therefore it can overlook inequalities or vulnerabilities that exist. For example, when we produce GDP, we also calculate a household saving rate. However, this is an aggregate measure of how much all Canadian households might be saving in a given period, and it doesn't highlight how there is great inequality that could exist amongst households with some faring much better than others. GDP also excludes unpaid household work and volunteer work, and these take place outside of the general market economy, which is why they're not included in GDP. However, these activities do have a very significant impact on a country's economic productivity and social value. For example, people could not go to work and support the economy if they didn't have people at home doing those activities like childcaring and cooking and cleaning. And finally, GDP does not account directly for the depletion of natural resources. Another common critique, I would say of the GDP measure is that it overlooks these environmental harms that can be caused by economic activities. However, I would say that the system of national accounts, which is that international framework for how countries should measure GDP does get updated periodically, and there's been a very strong recognition that some of these limitations that I just mentioned should be accounted for. And so with the newest version of this framework, there are recommendations that countries produce separate sort of extension or satellite accounts that take into account these various limitations. And a good example of this is that Statistics Canada produces something called the distributions of household economic accounts, where we estimate how income consumption, savings, and wealth are distributed across different types of households. And this product allows us to see that while, for example, maybe the household saving rate is increasing, it is not improving for all households. Some are faring better than others. Max: Yeah, that's so interesting because I think that oftentimes when we hear officials or reporters cite these numbers on GDP and we hear, oh, the economy is rebounding or doing well, like especially coming out of COVID, I think that that doesn't necessarily always resonate with Canadians because like you said, different households have different experiences and if we're being told the economy's doing great and it doesn't feel like that for you, it can be confusing. Amanda: Absolutely, absolutely. And sometimes those aggregate indicators that are included in GDP can be driven by a small segment of the population. If we're saying that, you know, households are spending more, it could be that households of higher income might be driving that spending where other households are looking at their own experience saying, that's not what's going on for me. So these additional products that really go below the top line number and dig into the data in a more granular way, help us and Canadians and policymakers really understand where there could be those vulnerabilities. Max: Okay, nice. And for those of us that follow economic news, we hear reporters frequently talk about the GDP, but I understand that there might be a difference in the way that they're talking about GDP and the way that we talk about it here at StatCan. Could you talk more about that for us? Amanda: Yeah, so when Statistics Canada reports the latest GDP data, we focus on the quarter-to-quarter percent change in the real GDP. So real GDP is an indicator of the volume of activity that takes place. So this removes the impact of price changes. We don't want to necessarily say that the economy increased just because prices went up. We're really looking to see whether or not, after we removed price change, did the economy in fact produce more goods and services. So that's what Statistics Canada focuses on. However, sometimes media outlets, people will often hear them quote the annualized quarterly percent change. And the main difference here is that the annualized rate compounds the quarterly growth rate by assuming that the same percent change will occur for four consecutive quarters. So when people look at the media or the news headlines, they'll see often a larger number quoted, both are accurate. The one that we report, the quarterly figure, or the one that the media reports, which is often the annualized quarterly figure, they're both accurate, but users should just take note in terms of understanding which one is being quoted. Max: Yeah, that makes sense. So if Canadians would like to learn more about the GDP or Canada's economy, where could they go? Amanda: So the Statistics Canada website would be a great starting point. We have the Daily article that provides an overview of the main stories and drivers of the most recent GDP data. But the economic account statistics portal is a good one-stop shop where you can find all of the latest data tables and analytical articles. Max: Thank you so much for coming in, Amanda. Thanks for your time and your expertise. Amanda: Of course. Thank you for having me. Max: You’ve been listening to Eh Sayers! Thank you to our guest, Amanda Sinclair. If you’d like to learn more about the GDP, you can visit the link in our show notes. This podcast is available wherever you get your podcasts. There, you can also find the French version of our show called Hé-coutez bien! If you like this show, please rate, review and subscribe. And as always, thanks for listening.