Economic performance: The basics

Published : 5 August 2015, 10:12 AM
Updated : 5 August 2015, 10:12 AM

Once ridiculed as the "bottomless basket", Bangladesh has recently been awarded the status of a lower middle income country by the World Bank (WB) as the Gross National Income (GNI) per capita of Bangladesh exceeded the $1,046 threshold. It is indeed a great moment of redemption and pride for the nation. However, it is not readily clear to many Bangladeshis (except the economists and the experts), what exactly the achievement of this momentous milestone means. This commentary explains, for the general readership, the basics of national income measurement.

The Gross Domestic Product (GDP) of a country is the value of aggregate output (goods and services) produced in a country. GNI roughly equals GDP plus net receipts of wage and property income from abroad. GNI thus includes income earned abroad by the nationals but it excludes income earned by foreigners.

The most primary calculation of aggregate national output/income is done at current market prices in the local currency unit (LCU), e.g., BDT, of the country leading to the Nominal GDP and GNI in Current Local Prices. These nominal measures can rise with local inflation (increasing prices), with even a reduced quantity of aggregate output/income really produced. Economists thus advocate price-adjusted output/income measures like Real GDP and GNI, calculated by dividing the Nominal GDP and GNI by a price level deflator. As the price deflator is commonly measured as a price index with a base year, the Real GDP and GNI figures are popularly reported in Constant Prices (if prices were held constant at the level of a base/reference year).

For example, if the base year is 2005-06 FY (Financial Year), the price index is 1.00 (or 100 if scaled up) by construction for that year; if prices rose 73.58% (83.57%) from 2005-06 FY to 2013-14 FY (2014-15 FY), then the GDP price index is 1.7358 for 2013-14 FY (1.8357 for 2014-15 FY). These are actually implied from the Bangladesh Bureau of Statistics (BBS) website that shows the 2013-14 and 2014-15 Nominal GDP figures to be BDT 13.438 billion and BDT 15.136 billion respectively, representing a 12.64% annual growth rate. The associated GDP in Constant (2005-06) Prices are BDT 7.741 billion (2013-14) and BDT 8.245 billion (2014-15), representing a 6.51% growth rate in GDP in real (price-adjusted) terms.

For international comparison, nominal GDP and GNI figures in LCU are converted to a common monetary unit like the US Dollar ($). This conversion involves the foreign exchange rate that can affect international ranking. The WB/IMF uses three alternative measures of exchange rate, namely, Current Dollar method, Atlas Current Dollar method and Purchasing Power Parity (PPP) Current International Dollar method.

The Current Dollar method converts the annual nominal income figures in LCU (e.g., BDT) to Current US Dollar figures using the average (of monthly averages) official exchange rate (LCU per $) during the year. Use of the average exchange rate is meant to reduce the distortion caused by abnormal exchange rate level at a given time or season. The GDP and the GDP Per Capita (=GDP/Mid-Year Population) are reported using the Current Dollar method. A country's performance based on these two measures may thus appear unduly good if its inflation rate is high (since nominal, not constant price or real, income figure in LCU is converted) and/or the average exchange rate is too low. Importantly, however, the associated growth rate reporting is based on real or constant price GDP in LCU, and are hence not biased by inflation or exchange rate effects.

The WB/IMF's GNI and GNI Per Capita figures underlying the recent recognition of Bangladesh as a lower middle income country are reported using the Atlas Current Dollar method. This method averages the current year's and the last two year's average exchange rates weighted by the country's inflation relative to international inflation during this time. The Atlas method intends to minimize the effect of year to year (instead of just within year) fluctuations in the exchange rate. It is still a nominal (not real) measure of income since neither the local prices nor the exchange rate is held the same over years. If, persistently, a country's price level increases but the official exchange rate (LCU/$) rises too little (consequent upon exchange market intervention, excess net inflow of foreign exchange, etc.), its reported GNI performance/improvement may appear unduly good.

The WB/IMF also reports GNI and GNI per capita using the PPP Current International Dollar method. Here the nominal GNI in LCU is converted to Current US Dollar using the PPP exchange rate, namely the amount of LCU (like BDT) currently needed to buy the same basket of goods and services that can be purchased currently in the US with one US Dollar. Hypothetically, if the US basket involved 0.10 kilo of beef only which currently costs say $1 in the US, and 0.10 kilo of beef currently costs BDT 60, then the PPP exchange rate would be BDT 60 per USD. Such an exchange rate can be quite different from the official and market exchange rates. For example, the PPP exchange rate can be low if the US basket is relatively less expensive in Bangladesh than in the US, perhaps because of low labor cost and abundant local/regional supply.

The PPP Current International Dollar method essentially involves measuring the real aggregate output/income of a country in terms of the number of US basket at current local prices. Since the basket currently costs $1 in the US, the US Dollar value of the aggregate real output/income of a country is in Current (International) Dollar. It seems that the PPP method, although not quite real (like the Constant Local Prices series) produces a better international comparison of real national output/income than the Current Dollar and the Atlas methods that are largely nominal in nature. But the method involves too many moving parts and hence it is relatively difficult to evaluate economic performance using this method.

The 2014 output/income figures for Bangladesh are estimated as:

  • GDP Current Dollar: $173.82 billion
  • GNI Atlas: $171.59 billion
  • GNI PPP Current International Dollar: $530.13 billion based on mid-year population of approximately 158.50 million
  • GDP Per Capita Current Dollar: $1,097
  • GNI Per Capita Atlas: $1,080 (lower middle income status based on the threshold of $1,046)
  • GNI Per Capita PPP Current International Dollar: $3,340.

Note that the Current Dollar and Atlas method figures are similar in magnitude while the PPP method leads to substantially higher income figures. This is because the PPP exchange rate (BDT per US Dollar) is about one-third of the official value implying a very low BDT cost of the US basket in Bangladesh.

Based on 2014 GNI Per Capita Atlas for 214 economies, Bangladesh's rank is 181 with thirty plus countries below Bangladesh; the ranking of Bangladesh improves somewhat to 171 under the PPP method. To put the economic rankings in perspective, the average GNI Per Capita Atlas are:

  • $635 (low income)
  • $730 (Nepal)
  • $1,080 (Bangladesh)
  • $1,270 (Myanmar)
  • $1,410 (Pakistan)
  • $1,527 (South Asia)
  • $1,610 (India)
  • $2,037 (lower middle income)
  • $2,390 (Bhutan)
  • $3,400 (Sri Lanka)
  • $7,893 (upper middle income)
  • $10,858 (World)

These relative positions do not change materially in terms of the PPP method, as indicated by the group averages increasing under this method:

  1. $1,593 (low income)
  2. $3,340 (Bangladesh)
  3. $5,395 (South Asia)
  4. $6,073 (lower middle income)
  5. $14,184 (upper Middle Income)
  6. $15,032 (World)

Bangladesh deserves every bit of admiration for overcoming the insurmountable odds of pre-liberation economic disparity, liberation war time carnage by the occupiers, post-liberation nasty international politics, destructive and corrupt politics internally, and the repeated natural calamities. As the nation celebrates the very deserving transition to the status of a lower middle income country, the above comparisons show, however, that there is a long and challenging runway ahead to achieve the next milestone, namely moving into the upper middle income status. In a fiercely competitive global arena, other nations are also striving equally hard, if not more.

Dr. Mo Chaudhury, is a professor at McGill University, Montreal, Canada.