When discussing economic growth, it is the percentage change in real GDP that is being referred to. The O’Neill Government in its 2017 National Budget even while acknowledging that the real GDP statistics it uses are wrong, uses them anyway. I wanted to better understand what the O’Neill Government forecasts for economic growth for 2016 and 2017 were and whilst analyzing the government’s economic statistics I discovered the revealed economic contraction 2016 (see here).

After fielding a few questions on my analysis, I thought it useful to try to provide a simple explanation that is perhaps more easily followed than my last post. There are also useful resources on the web you can look at to understand my approach (one example can be found here).

Method

To compute real economic growth you need data for real GDP. If you don’t have data for real GDP you can compute it, if you have data for nominal GDP and the GDP deflator, using this formula,

[Eq 1]    Real GDP = nominal GDP divided by GDP deflator

Where does my data come from?

All the data that enter the calculations all come from the O’Neill Government’s most important annual policy document – the National Budget. The data I use are easily obtained and my calculations are easily replicated.

I do not use any data from the International Monetary Fund (IMF) or the World Bank or the Asian Development Bank (ADB). I only rely on the O’Neill Government’s official numbers. I don’t make anything up and the formula used (see Eq 1 above) is standard.

Nominal GDP

Nominal GDP estimates are in the 2017 National Budget but the government presents explicitly (and inexplicably) four different sets of nominal GDP. In my earlier post (see here) I explain why I choose the series presented in Table 10(II) of Appendix 3 of Volume 1 of 2017 National Budget (see page 99 here). I thank Loi Bakani, Governor of the Bank of Papua New Guinea, for pointing me in the right direction with his statement (see here) that the 2017 budget estimates of nominal GDP are a result of the joint extrapolation exercise by Department of Treasury and Bank of PNG. The only series that publicly available information showed a match between the National Budget and Bank of PNG is reproduced below in Exhibit A.

Exhibit A

exhibit_a_ngdp

Source: Table 10 (II) – Appendix 3, Volume 1, 2017 National Budget

GDP deflator

The GDP deflator is a summary measure of the price level for the whole PNG economy. This data comes from the 2017 National Budget and is associated with the discredited real GDP estimates. However, I use it as:

  1. it is easier sometimes to estimate price changes than to estimate the changes in output production for the different components of GDP so I figure that the Government forecasters have a good handle on this; and
  2. I could use Government’s CPI inflation forecasts instead but the results remain unchanged as the forecasts for CPI inflation numbers are quite close to the GDP deflator inflation.

I note that the International Monetary Fund (IMF) adopt a similar, though tentative, approach in the 2016 Article IV report (see footnote 3 on page 5 here) that was vehemently opposed by Loi Bakani.

The numbers I use come from Table 1 of the Appendix 3 of the Volume 1 of the 2017 National Budget (see page 88 here) and are shown in Exhibit B.

Exhibit B

exhibit_b_deflator

Source: Table 1 – Appendix 3, Volume 1, 2017 National Budget

I will need to divide the GDP deflator index shown in Exhibit B by 100 for my calculations below. Why? This is because the deflator is given in index form and a particular year chosen to be 100 so I undo that to get right deflator for my calculations.

Real GDP: results

So we can use the simple formula shown in equation (1) above to compute real GDP. This is shown in Exhibit C.

Exhibit C

exhibit_c_results

Source: 2017 National Budget and author’s calculation

Let’s step through Exhibit C so you can follow what I do. Choosing year 2016, as an example, the nominal GDP estimate is K67,300 million. I deflate this using the GDP deflator from Exhibit B. What this means practically is that I divide K67,300 million by 2.7 to give K24,503 million as the real GDP estimate for 2016.

Real GDP growth: results

With an estimate of real GDP we can now compute real GDP growth. You use the simple growth formula, as taught in high school maths: take the estimate for any year divide by the estimate for the previous year subtract one and then multiply by 100 to get the percentage change (see here). This result is shown in Exhibit D.

Exhibit D

exhibit_d_2-results

Source: 2017 National Budget and author’s calculation

2016 economic growth of negative 1.6%

So using only Government statistics and the same internationally accepted formula used by Department of Treasury, Bank of PNG and National Statistical Office (as well as the IMF, World Bank and ADB) I show that the O’Neill Government statistics point to an economic growth of negative 1.6% in 2016, that is an economic contraction.

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