Better ways to measure the economy than GDP  

Sovereign states are no stranger to accounting controversies. This column reports on a number of alternative methods that can be used in measuring a country’s Gross Domestic Product. Stefano Fugazzi


London – Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices, but deviate from the spirit of those rules.

The practice of overstating income and understating expenditure is usually associated with large corporation falsifying their financial statements. Enron, Wordcom and Parmalat are the most extreme examples of companies that cooked their books.

Sovereign states are also no stranger to accounting controversies.

In the late 1990s Greece falsified data about its public finances and deliberately obstructed the collection of accurate statistics to fulfil the Maastricht criteria and join the Eurozone.

In 2016 Ireland was criticised for its accounting practices as the country’s Central Statistics Office claimed that the Irish economy grew by 26 percent in 2015.

More recently, attention turned to China. Many analysts are sceptical about the official statistics released by the Chinese government.

In a recent bulletin published by the Federal Reverse Bank of St. Louis, issues with official Chinese government statistics have fostered attempts to obtain better estimates of Chinese GDP, using a wide range of alternative methods.

Change in energy consumption

A method looks at variations in energy consumption. As an emerging economy with a large manufacturing sector, China consumes a lot of energy. Changes in energy consumption may be a good proxy for changes in economic output. Energy usage typically correlates with output and can be verified by third-party data.

According to economist Thomas Rawski, between 1997 and 2000 official figures reported that Chinese real GDP grew 24.7 percent whilst energy consumption decreased 12.8 percent during the same period.

Energy consumption is an imperfect proxy of economic growth. A country’s energy usage could be impacted by several factors external to economic output such as increased efficiency or a shift from an industrial to a service economy.

For this reason, alternative measures have been developed to measure GDP.

Multi-index approach

Most multi-index measures look at a wide array of indicators, including freight volume, passenger travel, electricity output, construction indicators, purchasing managers indices, financial indicators like money supply and the stock market.

Unsurprisingly, all leading multi-index approaches suggest China’s GDP growth is lower than the official estimates.

Li’s index

Perhaps the most popular index for Chinese GDP is the one suggested by and named after Li Keqiang, then China’s vice premier and now premier.

In 2007 Li Keqiang claimed that “Chinese GDP figures are man-made” and unreliable. The Chinese prime minister suggested using electricity production, rail cargo shipments and loan disbursements to estimate China’s true economic performance.

Luminosity index

Another alternative method uses satellite data to measure the intensity of man-made night lights.

Unlike most economic indices, these data are immune to falsification or misinterpretation.

The night-lights data are gathered by Air Force satellites circling the earth 14 times a day. The satellites measure the light intensity emanating from specific geographic pixels, which can be aggregated to subnational, national and supranational levels.

In 2012, economists J. Vernon Henderson, Adam Storeygard and David N. Weil created a dataset using information from night-lights satellites and applied it to estimate GDP growth in countries with low-quality data. Their assessment suggests that between 1992 and 2006 the Chinese economy expanded by 57 percent whilst the official growth rate over the same period is about 122 percent.