Saturday, August 20, 2005

Bad economics - confusing growth with levels

Here's a pet peeve of mine, reported in what is supposedly the premier business paper in the country.

Lower GDP due to oil price increases

Read the original article folks. It's GDP growth, not GDP itself, which will be reduced, i.e. growth will slow down - according to Mr. U of UAP. But the reporter keeps writing it as if it is the level of GDP itself that falls.

Mr. U's basis is the IMF rule of thumb. I did a search of this IMF rule of thumb and based on two sources, the actual statement of this is as follows: A US$ 5/barrel increased sustained over a year, will reduce the next year's global GDP growth by 0.3 percent. So Mr. U used a conservative version of the rule of thumb, and applied it to last year's oil price hikes of about 30%.

Rules of thumb are by nature crude approximations - not to be dogmatic about it, but just between you and me, I think its an overestimate. NEDA itself seems to be using the rule of thumb that every US$ 10 hike will shave off a 0.1 percentage point off the GDP growth this year. There, I think that's a bit better.

No comments: