Estonian Human Development Report
Estonian Human Development Report - Eesti Koostöö Kogu
Estonian Human Development Report - Eesti Koostöö Kogu
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1.4. The gross domestic product and<br />
people’s standard of living<br />
The gross domestic product as a measurement<br />
of economic activity<br />
A country’s gross domestic product (GDP), which is the<br />
basis for evaluating economic activity, plays an important<br />
role in the calculation of the <strong>Human</strong> <strong>Development</strong> Index.<br />
One of the three components of HDI is GDP per capita,<br />
which measures economic activity and the income generated<br />
per capita.<br />
In an increasingly integrated world, the statistics characterizing<br />
the economic development of various countries<br />
must be comparable. Four conditions must be met for an<br />
international GDP comparison:<br />
• The definition of GDP must be the same<br />
• GDP must be measured in the same way<br />
• The value or currency in which the GDP is expressed<br />
must be the same<br />
• GDP must be expressed at the same price level<br />
Definition of GDP and its<br />
measurement<br />
GDP (in market prices) is the sum of the added value produced<br />
by the residents 1 throughout the gross national<br />
economy, to which net taxes on products are added. Generally<br />
the accounting of GDP by European Union and<br />
OECD member states corresponds to the first and second<br />
conditions, since the accounting of the national economy<br />
is based on the System of National Accounts 1993 (SNA<br />
93) and the European System of Accounts 1995 (ESA 95)<br />
based thereon. The system for national accounts includes<br />
definitions, classifications and accounting rules. Since<br />
Statistics Estonia is part of the European statistical system,<br />
we must guarantee the conformity of our accounting<br />
methods with the methodology and accounting principles<br />
that apply to all of Europe. Statistics Estonia has compiled<br />
national account statistics based on ESA 95 since 1996.<br />
At the same time, the measurement of GDP in all the EU<br />
member states does not cover the entire national economy<br />
to the same extent. Thus in countries with large exhaustiveness<br />
GDP may be underestimated depending on how well the<br />
non-observed part of the economy is reflected in the country’s<br />
accounting of GDP. Therefore the second conditions<br />
may not be fulfilled to the same extent in all countries. In<br />
Estonia, the -exhaustiveness is measured using methodology<br />
accepted by Eurostat and therefore its measurement should<br />
be comparable to that of the other member states. In national<br />
accounting, regular GDP recalculation takes place upon<br />
changes in regulations, definitions and classifications. At the<br />
same time, recalculations are also made for previous periods<br />
upon improvements in methodology or the implementation<br />
of new methodologies. As an EU member state, it is Estonia’s<br />
obligation to bring its methodology of national accounting<br />
into full conformity with EU requirements that guarantee<br />
the comparability of the accounting of the member states.<br />
Accounting methodology<br />
Estonia, like the other countries that acceded to the European<br />
Union in 2004, had to fulfil pre-accession criteria<br />
established for the methodology of national accounting<br />
by the European Commission. The fulfilment of these<br />
criteria guaranteed the better comparability of statistics<br />
with the remaining EU member states. Statistics Estonia<br />
updated its accounting methodology for the 2006 GDP<br />
based on a system of tables for supply and demand and<br />
adjusted its GDP measurement. To express economic<br />
growth, GDP change has been used as an agreement.<br />
In order to assess the change in GDP over time, and to<br />
procure information about its real growth, the impact of<br />
price changes must be eliminated. In simple terms, the<br />
value of real GDP in current prices is found by dividing<br />
the GDP value by the price index for goods and services.<br />
The growth of the GDP deflator 2 shown in Table 1.4.1.<br />
indirectly expresses the average price change in goods<br />
and services included in accounting of GDP. The faster<br />
prices increase, the slower real GDP growth is in the case<br />
of identical GDP nominal growth.<br />
As of the fall of 2008, Statistics Estonia uses the chainlinking<br />
method to measure real GDP growth. In this method,<br />
the base year is not fixed, but the previous year of the accounting<br />
period is used as the base. Therefore calculations must be<br />
made in the prices from the previous year, and thereafter a<br />
chain is formed to compare various periods. This allows real<br />
changes to be measured more accurately than using a fixed<br />
base year (2000) as was done previously. The implementation<br />
of the chain-linking method guaranteed better international<br />
comparability for GDP and its components. Almost all European<br />
Union and the majority of the world’s developed countries<br />
(e.g. US, Canada, Japan, Norway and Switzerland) use<br />
the chain-linking method to measure real GDP growth. In<br />
2007, <strong>Estonian</strong> real GDP growth had the fastest drop in the<br />
European Union, from 10.4% in 2006 to 6.3% in 2007. However,<br />
here too GDP is measured in the local currency or common<br />
currency of the Community, based on the price levels<br />
of individual states, and therefore all the countries cannot be<br />
compared unequivocally.<br />
Accounting of GDP based<br />
on a common currency<br />
and uniform price level<br />
The third condition for guaranteeing the international<br />
comparability of GDP, by using a common currency, is<br />
1<br />
Resident — an institution having economic interests in given state and being committed with economic territory of it.<br />
2<br />
Deflator – price index used for transforming prices from one time-period to another.<br />
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