GDP - outlook from OECD

Assessment versions

Published (reviewed and quality assured)

• No published assessments

Rationale

Justification for indicator selection

Economic and social development raises income levels; this is one of the benefits of GDP growth. However, each percentage point of GDP growth also represents a corresponding increase in land and resource consumption as well as more pollution and waste. When the force behind GDP growth is too strong and the power to check GDP growth is too weak, an imbalance occurs. The rapid growth of GDP will lead to a dramatic increase in land and resource consumption. Then it will be difficult to stop the deterioration of the ecological environment. The crucial issue here is that the GDP growth rate has been made an inflexible target by government at all levels. They often have no effective checking system for other indicators and if they do, they rarely consider them (Zhong Maochu, 2006).

GDP growth contributes significanty to developement and, therefore, to environmental impact from freight and passenegr transport demands, use of energy and land use. For more detailed information about justification for these indicators can be found here.

The GDP outlook provides an indication on economic driving forces. It is used in many models to evaluate other driving forces and their impact on environment.

Scientific references

• No rationale references available

Indicator definition

Gross domestic product (GDP) is the sum of gross value added by all resident producers in an economy, plus any product taxes, minus all subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets and degradation of natural resources. It is expressed in constant 2000 USD.

Units

The indicator is measured in $ per capita (using PPS).

Policy context and targets

Context description

At the global level problems of the growth of GDP and incomes of popualtion are becoming ones of the most actual. Therefore, plethora of policies provides aims and goals concerning achievements of sustain GDP growth. The central aims have been provided within UN "Millennium Development Goals" (1st goal to eradicate extreme poverty). It includes reduction of proportion people living on less than a dollar a day.

At pan-Euroepan, EU and EECCA levels mostly all countries have its own programme of systainable development with defined projections of GDP for further time periods.

At EU level there are some specific documents which cover development of poorest regions in EU (GDP is less than 75% of average GDP in EU). Regional Policy was signed by EU parliament. The policy indices trends in higher GDP growth for such regions and defines main directions of investments to carry out that target.

Targets

Global level

• Reduce by half the proportion of people living on less than a dollar a day

Related policy documents

• The EU's Strategy for Sustainable Development
  Commission of the European Communities CEC (2001b): A Sustainable Europe for a Better World: A European Union Strategy for Sustainable Development (Commission's proposal to the Gothenburg European Council), COM (2001)264 final, Brussels, 15.5.2001
• World Summit on Sustainable Development Plan of Implementation
  UN 2002: 'Plan of Implementation of the World Summit on Sustainable Development'

Methodology

Methodology for indicator calculation

Projections of domestic demand components and output (GDP) are made in "real" terms, i.e. adjusted for inflation. Projections are made for the 2005-2050 period.

Major Features of the OECD projections:

The OECD projections and the accompanying analysis have a clear focus on framing the policy debate in Member countries. Moreover, the OECD projection exercise distinguishes itself by a number of special features which are absent in most other forecasts:

1.  The OECD assessments of the future trends of key macroeconomic variables are better characterised as conditional projections rather than forecasts, since they are conditional on a set of technical assumptions about nominal exchange rates and the path of oil- and non-oil commodity prices as well as on mandated macro policies. Thus, the OECD projections provide answers to questions like: "What is likely to happen in country X if the government implements mandated fiscal measures?", or, "On mandated policies, what kind of imbalances or pressure points are likely to develop over the next two years e.g. in the form of widening current account imbalances or higher unemployment?". This in turn helps to identify potential problems in the economy and to foster a debate among policy makers about what can be done to achieve better outcomes.
2.  The OECD projection process ensures that projections are consistent at the world level. First, consistency is sought through the OECD's "internal" production process. The twice-yearly forecasting exercise starts with a broad exchange of views among OECD country experts and topic specialists. This provides a consistent starting point for the global outlook and its potential interactions with individual country projections through trade and financial linkages. Second, international consistency is ensured via a predetermined iteration process feeding through the OECD's INTERLINK world economic model, and by discussions between country and international trade experts.
3.  There is a built-in "reality check" as the OECD benefits from the participation of government experts and policy makers in arriving at its projections. The OECD holds extensive discussions on the projections and related analyses with Member country government experts and policy makers. The OECD meets with government and central bank economic forecasters to test its tentative conclusions against their knowledge of local conditions. The main lines of the Economic Outlook projections and analysis are presented to, and their policy implications discussed by, the OECD Economic Policy Committee, which is composed of senior officials from finance or economic ministries and central banks. Finally, country expertise is drawn from the surveys of Member and selected non-member economies published regularly by the OECD.

Scenarios and simulations

An important part of the OECD analysis is to consider the balance of risks around the central projections, and to explore the medium-term effects of various alternative scenarios. For this reason a medium term reference set of projections is regularly produced and INTERLINK is used extensively when considering the medium term impacts of these alternative, or "what if" scenarios. Over the past few years, scenarios have been conducted to illustrate issues such as long-term prospects for government budgets; the causes of widening current account imbalances; and the interactions between labour markets, social transfers and budget consolidation. In terms of short term analysis, simulations have been conducted recently, inter alia, with the view to show possible implications of sharp corrections in stock market prices; faster than expected growth in the United States (a Boom-Bust scenario); Faster growth in the OECD area due to high cyclical synchronisation; the implications of a weaker euro, and the impact of higher oil prices.

The medium-term reference scenario is highly conditional on specific assumptions about policies and economic developments in OECD and non-OECD countries and regions. It is also intended to provide insights on the possible build-up or unwinding of specific imbalances and tensions in the world economy over the medium term, and the scope for policies to assist the adjustment process. The medium-term reference scenario extends the short-term projections on a consistent basis over a five-year horizon. By construction, it does not embody a view about timing and extent of future cyclical events. Instead, it assumes a pattern of growth such that the gap between actual and potential output as well as the gap between actual and structural unemployment are broadly eliminated in all OECD countries over the medium term. Commodity prices and exchange rates are kept broadly unchanged in real terms. Monetary policies are assumed to be directed towards keeping inflation low, in line with medium-term objectives.Fiscal policies are, for the most part, assumed to be broadly unchanged i.e. the cyclically-adjusted primary balance is held approximately constant. This implicitly implies that the authorities take measures to offset underlying changes in the cyclically-adjusted primary balance, such as those stemming from expenditures related to the ageing of populations in most OECD countries. These assumptions result in falling debt-to-GDP ratios in most countries.

INTERLINK model properties 

The model links together a set of small to medium-sized quarterly macro models for each OECD member country - with reduced-form relationships for trade and balance of payments of the six non-OECD country groupings and for commodity prices. A key feature of the model is its treatment of the world economy as a coherent and integrated whole. This means that developments in individual domestic economies, international trade and exchange rates and financial flows are determined simultaneously and, as far as possible, on a globally consistent basis. Considerable emphasis is therefore given to international economic linkages through trade and financial conditions.

The model's overall structure reflects the range of its practical uses in the work of the OECD Economics Department. In the context of the OECD's regular macroeconomic analysis and projections exercise, the model and the econometric analyses that lie behind it perform a variety of functions including: an aid to the construction and co-ordination of individual country projections, the production of globally-consistent trade projections and the preparation of alternative projections and scenarios through model-based simulation exercises.

Although broadly neo-classical in terms of structural specification and equilibrium properties, the dynamic adjustment of output, employment and prices to long-term equilibrium in the current version of the model can be classified as being essentially "New Keynesian", reflecting  the presence of real and nominal rigidities in wage and price setting. In particular such rigidities mean that following a shock to the economy there will be a protracted period of adjustment before equilibrium is restored and hence persistence in output and employment disequilibria.

More detailed descriptions can be found here.

Methodology for gap filling

For data gap filling retropolation of series is used. It means that for historical period where the national statistical institutes (NSI) do not provide revised data, data have been spliced backward using the growth rates issued from the previous national accounts.

Methodology references

• Sources & Methods of the OECD Outlook

Data specifications

EEA data references

• No datasets have been specified here.

External data references

• Economic Database Inventory (National Statistical Institutes variables)

Data sources in latest figures

Uncertainties

Methodology uncertainty

OECD projections are just that, projections and not predictions. Analysis enriches the projections and provides a framework for evaluating outcomes and recommending policy changes. As to the risks, analysis can only point to them, it cannot say precisely which ones will occur or when. Economics is not an exact science. It deals ultimately with human behaviour, which changes based on experience and expectations. And it must strive to adapt as economies and economic systems evolve. The OECD regularly reviews its projections for accuracy. A main purpose of these reviews is to isolate whether errors are due to data revisions, to the non-realization of underlying assumptions or to judgmental mistakes about economic conditions and forces shaping the outlook. Indeed sometimes projections show current policies leading to unsatisfactory outcomes, which may lead to policy changes, in turn showing up as (desirable) projection errors. Large projection errors typically occur around major turning points in economic activity. The reasons for this are subject to debate. They may be due to lapses in judgement or a decline in the predictive power of the information available at cyclical turning points. On the latest assessment of the accuracy of the OECD projections see Koutsogeorgopoulou (2000) and Lenain (2002).

Data sets uncertainty

No uncertainty has been specified

Rationale uncertainty

As merely a gross measure of market activity, GDP only counts money transactions. The more things are axcluded, such as care for the elderly and for children, home maintenance and cleaning, food preparation, and voluntary service for neighborhood, church, and civic groups. This can be a serious problem in the economies of less-developed nations, where much production takes place in the household economy.

Furthermore, while GDP ignores everything that happens outside the realm of monetized exchange, regardless of the importance to well-being. It is outlined a number of similar situations under which GDP growth results from negative occurances in society, including spending on stress treatment and other medical costs, ATM fees, traffic, gambling, and spending into debt and paying interest.

Moreover, GDP trets depletion of natural capaital (assets) as current income - an obvious violation of good accounting principles. In addition, in the past when economists used gross national product (GNP) instead of GDP, it meant that the earning of a multinational firm were attributed to the country where the firm was owned - and where the profits would eventually return.

More information about term uncertainty should be found here.