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Home / News / India /  Why real GDP may not capture growth accurately

According to the International Monetary Fund (IMF), the global economy grew by 2.9% in 2019 - the slowest expansion since the global financial crisis. And new research suggests that this growth figure could be underestimating the extent of the global slowdown. In a new study, Jacob Assa of the New School for Social Research raises questions about the veracity of real GDP growth - the common measure of economic progress in countries around the world.

He suggests that real GDP growth rates are a poor macroeconomic indicator as they do not correct for the speculative bubbles in the financial and real estate sectors. He argues that real GDP only captures output in terms of the goods and services in the economy while adjusting for inflation, but does not accurately account for credit and debt. For instance, a greater flow of credit to speculative purchases in real estate or stocks contribute to GDP growth rates but does not contribute to productive activities and employment. The use of real growth rate incentivizes policies such as deregulation, privatization and financialization which contributes to short-term profits and seem growth-friendly but may increase the risks of financial instability.

Instead, he suggests that economists use ‘hedged growth rates’. Hedged growth adjusts nominal GDP growth not just for inflation but also for speculative activity in economies. It does this by adjusting growth rates for the changes in the value of financial and real estate assets. He finds that this hedged growth rates move far more in line with employment growth than real growth and could explain the persistence of ‘jobless growth’ in economies. Since so much economic policy is based on growth rates, a more accurate measure of growth is the first step towards better policy, he concludes.

Also read: Measuring an Unstable Economy: A Hedged Rate of Growth

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