Estonian Human Development Report

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1.4. The gross domestic product and people’s standard of living The gross domestic product as a measurement of economic activity A country’s gross domestic product (GDP), which is the basis for evaluating economic activity, plays an important role in the calculation of the Human Development Index. One of the three components of HDI is GDP per capita, which measures economic activity and the income generated per capita. In an increasingly integrated world, the statistics characterizing the economic development of various countries must be comparable. Four conditions must be met for an international GDP comparison: • The definition of GDP must be the same • GDP must be measured in the same way • The value or currency in which the GDP is expressed must be the same • GDP must be expressed at the same price level Definition of GDP and its measurement GDP (in market prices) is the sum of the added value produced by the residents 1 throughout the gross national economy, to which net taxes on products are added. Generally the accounting of GDP by European Union and OECD member states corresponds to the first and second conditions, since the accounting of the national economy is based on the System of National Accounts 1993 (SNA 93) and the European System of Accounts 1995 (ESA 95) based thereon. The system for national accounts includes definitions, classifications and accounting rules. Since Statistics Estonia is part of the European statistical system, we must guarantee the conformity of our accounting methods with the methodology and accounting principles that apply to all of Europe. Statistics Estonia has compiled national account statistics based on ESA 95 since 1996. At the same time, the measurement of GDP in all the EU member states does not cover the entire national economy to the same extent. Thus in countries with large exhaustiveness GDP may be underestimated depending on how well the non-observed part of the economy is reflected in the country’s accounting of GDP. Therefore the second conditions may not be fulfilled to the same extent in all countries. In Estonia, the -exhaustiveness is measured using methodology accepted by Eurostat and therefore its measurement should be comparable to that of the other member states. In national accounting, regular GDP recalculation takes place upon changes in regulations, definitions and classifications. At the same time, recalculations are also made for previous periods upon improvements in methodology or the implementation of new methodologies. As an EU member state, it is Estonia’s obligation to bring its methodology of national accounting into full conformity with EU requirements that guarantee the comparability of the accounting of the member states. Accounting methodology Estonia, like the other countries that acceded to the European Union in 2004, had to fulfil pre-accession criteria established for the methodology of national accounting by the European Commission. The fulfilment of these criteria guaranteed the better comparability of statistics with the remaining EU member states. Statistics Estonia updated its accounting methodology for the 2006 GDP based on a system of tables for supply and demand and adjusted its GDP measurement. To express economic growth, GDP change has been used as an agreement. In order to assess the change in GDP over time, and to procure information about its real growth, the impact of price changes must be eliminated. In simple terms, the value of real GDP in current prices is found by dividing the GDP value by the price index for goods and services. The growth of the GDP deflator 2 shown in Table 1.4.1. indirectly expresses the average price change in goods and services included in accounting of GDP. The faster prices increase, the slower real GDP growth is in the case of identical GDP nominal growth. As of the fall of 2008, Statistics Estonia uses the chainlinking method to measure real GDP growth. In this method, the base year is not fixed, but the previous year of the accounting period is used as the base. Therefore calculations must be made in the prices from the previous year, and thereafter a chain is formed to compare various periods. This allows real changes to be measured more accurately than using a fixed base year (2000) as was done previously. The implementation of the chain-linking method guaranteed better international comparability for GDP and its components. Almost all European Union and the majority of the world’s developed countries (e.g. US, Canada, Japan, Norway and Switzerland) use the chain-linking method to measure real GDP growth. In 2007, Estonian real GDP growth had the fastest drop in the European Union, from 10.4% in 2006 to 6.3% in 2007. However, here too GDP is measured in the local currency or common currency of the Community, based on the price levels of individual states, and therefore all the countries cannot be compared unequivocally. Accounting of GDP based on a common currency and uniform price level The third condition for guaranteeing the international comparability of GDP, by using a common currency, is 1 Resident — an institution having economic interests in given state and being committed with economic territory of it. 2 Deflator – price index used for transforming prices from one time-period to another. | 26
Table 1.4.1. Nominal and real GDP growth in Estonia 2000–2007 Current prices, in millions of EEK Chain-linked volume by 2000 Growth GDP deflator reference year, in millions of EEK of GDP deflator, % Nominal GDP growth, % Real GDP growth, % 2000 95491.0 95491.0 1.000 2001 108218.3 102808.2 1.053 5.3 13.3 7.7 2002 121372.2 110847.5 1.095 4.0 12.2 7.8 2003 136010.2 118736.5 1.145 4.6 12.1 7.1 2004 151012.2 127682.2 1.183 3.3 11 7.5 2005 173530.2 139373.2 1.245 5.3 14.9 9.2 2006 205038.1 153835.9 1.333 7.0 18.2 10.4 2007 238928.9 163578.1 1.461 9.6 16.5 6.3 Source: Statistics Estonia fulfilled only by the countries in the euro zone. The third condition is also partially fulfilled by accounting GDP according to a common value by using exchange rates. The adoption of the European Union’s common currency, the euro, was compulsory for all EU member states (the only exceptions are Denmark and the United Kingdom). The Government of the Republic and the Bank of Estonia have set a goal of adopting the euro at the first opportunity, once Estonia is able to fulfil the necessary requirements. According to the Bank of Estonia’s assessment in 2008, accession to the euro zone will be possible in 2011 or 2012 [Ross, 2008], although this projection may change due to the economic downturn. In order to compare the real GDP of a country by time period, for instance by year, one must eliminate price changes. Likewise, in order to compare the GDP of a group of countries at a specific point in time, the differences resulting from their price levels must be eliminated. Since GDP is measured according the price levels of a specific country, the fourth condition is not fulfilled. While general price indices are used to eliminate the GDP price changes measured in a country at various times, Purchasing Power Parities (PPP) 3 are used to eliminate the impact of various price levels in groups of countries (e.g. the European Union),. With the help of PPP, the impact of international price differences is eliminated in GDP measurement. As a result of PPP conversion, the GDP in Purchasing Power Standards (PPS) 4 is arrived at. Expressed as PPS, we can arrive at a real international comparison of GDP. In other words, international value and price differences are eliminated and a “pure” GDP volume can be compared. Estonian GDP per capita in Purchasing Power Standards increased to 68% in 2007 in comparison to the average of the EU 27 member states. In comparison, the corresponding indicator for Latvia was 55% and for Lithuania, 60%. According to PPS, GDP change increases with rapid GDP growth compared to the EU and the decrease in Estonian population, while price increases in Estonia reduce this indicator. Figure 1.4.1. Comparison of GDP growth in Estonia and selected other countries in 2000–2007 (%), calculated by the chain method 12 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 Source: Statistics Estonia, Eurostat Estonia Latvia Lithuania United States Japan EU27 Figure 1.4.2. Increase of the Estonian GDP deflator and PPP in percentages in 2000–2007 10 9 8 7 6 5 4 3 2 1 0 2001 2002 2003 2004 2005 2006 2007 GDP deflator Source: Statistics Estonia, Eurostat GDP Purchasing Power Parities As a result of the sudden deceleration of real GDP growth and the acceleration of price increases, the GDP growth in PPS also slowed in 2007. While this indicator increased by 6.8% and 6.9% in 2005 and 2006 respectively, in 2007 it was only 4.1% (see Figure 1.4.3.). 3 Purchasing Power Parities are exchange rates for currencies that equalize the purchasing power of various currencies. 4 The Purchasing Power Standard is an “artificial” unit of currency that equalizes the prices of all identical goods and services in comparable countries. 27 |
Page 1 and 2: Estonian Human Development Report
Page 3 and 4: Estonian Human Development Report T
Page 5: 4.2. Ethnic differentiations in sat
Page 9: Preface This year, the Estonian Hum
Page 12 and 13: CHAPTER 1 Estonian Human Developmen
Page 14 and 15: Figure 1.1.3. Life expectancy in co
Page 16 and 17: Figure 1.2.2. Life expectancy at bi
Page 18 and 19: to reality. The greatest inaccuracy
Page 20 and 21: Figure 1.2.9. Internal migration ev
Page 22 and 23: 12. Marksoo, A. 1992. “Dynamics o
Page 24 and 25: Table 1.3.1. PISA 2006 study result
Page 26 and 27: Table 1.3.2. Number of students in
Page 30 and 31: Figure 1.4.3. Estonian GDP (right a
Page 32 and 33: 1.5. Changes in the Estonian Human
Page 34 and 35: 2.2. Health of Estonian residents i
Page 36 and 37: Table 2.2.4. Differences in life ex
Page 38 and 39: Figure 2.4.1. Healthy life years of
Page 40 and 41: Figure 2.4.4. Various accidents, tr
Page 42 and 43: 2.5. Lifestyle and behaviour as a s
Page 44 and 45: Figure 2.5.5. Smoking in Estonia in
Page 46 and 47: Figure 2.6.1. Overview of the compo
Page 48 and 49: Table 2.6.2. Use of specialized med
Page 50 and 51: dren. The majority of services are
Page 52 and 53: Figure 2.8.2. How much a health dis
Page 54 and 55: 2.10. Policy recommendations aimed
Page 56 and 57: CHAPTER 3 Quality of life and life
Page 58 and 59: Table 3.2.1. Characteristics of liv
Page 60 and 61: Table 3.2.4. An assessment of the e
Page 62 and 63: Figure 3.2.4. Difference in the job
Page 64 and 65: Table 3.2.6. Agreement with stateme
Page 66 and 67: Figure 3.3.1. Satisfaction with lif
Page 68 and 69: Figure 3.3.4. Percentage of people
Page 70 and 71: Figure 3.4.1. Types of quality of l
Page 72 and 73: Figure 3.5.1. Percentage of teenage
Page 74 and 75: Figure 3.5.4. Percentage of respond
Page 76 and 77: Arieh A., Conti C., Kutsar D., Nicg
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Figure 3.6.2. Subjective quality of
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Pieper, A. Sixsmith, Care related q
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Figure 3.7.1. The placement of Euro
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Figure 4.2.1. Life satisfaction by
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Table 4.2.1. Factors forming genera
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Annexes Annex 4.2.1. Socio-demograp
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Figure 4.3.1. Changes in the assess
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Figure 4.3.4. Attitudes of the Esto
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olds considered themselves to be pa
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Table 4.4.3. Agreement of the Russi
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Table 4.5.2. The prospects of non-E
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Figure 4.5.4. Certainty of Estonian
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mote equal opportunities. At the (e
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CHAPTER 5 Quality of life in a cons
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Figure 5.2.1. GDP and AIC per capit
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Figure 5.2.3. Distribution of consu
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Figure 5.2.4. Indexes of environmen
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Table 5.3.1. Comparison of countrie
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Figure 5.3.3. Comparison of types o
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Table 5.3.5. Connections between po
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Table 5.4.1. Who and what are the f
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Table 5.4.3. Young people’s asses
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Figure 5.4.6. Time spent on the con
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Table 5.4.6. The perception of prob
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5.6. Summary To briefly summarize t
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Table 6.2.1. Objective and subjecti
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Figure 6.2.4. Relationship between
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Figure 6.2.7. Difference between th
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Figure 6.3.1. GDP, government secto
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Figure 6.3.3. Employed 15-74-year-o
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Figure 6.3.8. Percentage of social
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References 1. Aaviksoo, A., G. Paat
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Figure 6.4.1. Labour market flexibi
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Figure 6.4.3. Creations of jobs ind
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Figure 6.4.5. Public expenditures o
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Figure 6.4.6. Ratio of the particip
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6.5. Cities as development engines
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Table 6.5.2. Existence of developme
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have been underfinanced or are not
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Table 7.1. Factors that favour and
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Table 7.2. Potential economic devel
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Authors Chapter 1 Ene-Margit Tiit,
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Margit Keller (PhD) is a Senior Res
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Special prizes Estonian Human Devel
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Estonian Human Development Report H
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Estonian Human Development Report H
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Estonian Human Development Report T
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Honorable mentions Estonian Human D
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Estonian Human Development Report P
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Estonian Human Development Report A
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Estonian Human Development Report T
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Estonian Human Development Report

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