Macroeconomics Essay

Summarise the lecture given by Joe Grice

On 5th February 2015 Joe Grice, Director and Chief Economist at the Office for National Statistics (ONS), delivered an academic lecture to economic students at Reading University. His lecture focused on national accounts with specific reference to Gross Domestic Product (GDP). Grice discussed: how GDP is measured, at which times of the business year data is collected; and from the point of view of an economist, to what extent is the measurement useful?

Grice defined GDP as the “cumulative value added in the production process”. This was interesting as I understood GDP as being a combination of output and two other measures namely: the national income method (the sum of all payments to factors of production); and the expenditure method (expenditures on final goods & services);

I had previously understood that data from all three sources provides current estimation of GDP and that the ONS used some sort of algorithm to average the figures out. However, Gross Value Added (GVA), Grice told us was “the increase in the value of goods and services as a result of the production process.” It can also be defined as “the value of production minus the value of intermediate goods” (Riley, 2012).

Grice made clear that the ONS methodology is as simple and accurate as possible. This is important as it deals with vast quantities of complicated data from a range of sources such as Her Majesty’s Revenue and Customs (HMRC), manufacturers and trade organisations. The calculation process starts with the production inputs from across the economy (for example labour and raw materials) and at different stages throughout production goods and services may be used as “intermediate consumption” causing data to change.

Grice referred to the United Nations’ (UN) System of National Accounts (SNA), written in 2008 on the internationally agreed standards on how to compile measures of economic activity. The SNA offers an internationally agreed coherent, consistent and integrated set of concepts, definitions, classifications and accounting rules for macroeconomic analysis. This allows information on a nation’s economy to be shared and compared meaningfully across the world.

Economic data requires time to be analysed, and improves after thorough evaluation. “An impact of the time lag is that the effect of the policy may be more difficult to quantify because it takes a period of time to occur.” (Time Lags, economicshelp.org). This time lag allows the ONS to adjust or amend GDP figures as analysis revises data whilst new data becomes available. The ONS puts this into consideration when collating data for GDP. In particular, income data must be handled with some pessimism. According to Grice, it is “not its best quality until up to two years after the event”. On the positive side “other sets of data are available much sooner and can be used up to several weeks after the event.”

Grice moved onto to discuss the sequencing stage. Gathering alternative data up to 25 days after the end of a quarter, provides up to 44% of output data alongside spending data. This means that throughout the sequencing process data is accurate. In June or October the ‘Annual Blue Book’ becomes available, providing substantial economic data. This inevitably leads to revisions of GDP. In 2013, for example, amended figures from 2012 allowed growth to be revised upwards; this meant the double dip recession disappeared. This can be particularly frustrating for politicians, firms and households as financial decisions need to rely on precise data.

In theory, the methods of generating GDP should be homogenous, however in reality they are not. This means that the data must be put through a process called ‘data confrontation’ which compares data that has generally been derived from different surveys. This is necessary for ONS as it receives data from multiple sources. ONS has its own system of data