The Choice of Numeraire Matters When Calculating World GDP Growth
December 15th, 2015
by Maurice Obstfeld, Oya Celasun, Mandy Hemmati and Gian Maria Milesi-Ferretti
Appeared originally at Voxeu.org 11 December 2015
IMF data showed that the dollar value of ‘planetary GDP’ fell in 2015, but the IMF projects that world real GDP growth and inflation will be positive. This column notes that there is no inconsistency here.
The decline in the dollar value of ‘planetary GDP’ reflects the 2015 increase in the value of the US dollar, not calculation errors or inconsistencies between real growth, inflation, and nominal GDP projections. The choice of numeraire matters in measuring nominal GDP growth, especially in years with very large currency movements such as the ones we have seen this year.
A recent VoxEU column (van Bergeijk 2015) noted the projected 4.9% decline in 2015 world GDP measured in current US dollars in the IMF’s October 2015 World Economic Outlook report (IMF 2015). Given the positive world real GDP growth and positive world inflation rates projected for 2015 in the same report, the author suggested that the IMF forecast may be inconsistent.
We note that this suggestion misses the simple reason why world GDP in current US dollars declined in 2015: the large appreciation of the US dollar—the numeraire currency for nominal GDP in current US dollars—against virtually all currencies in 2015. Against a trade-weighted basket of world currencies, the US dollar stood some 13% higher in the first nine months of 2015 than its average level the year before. Based on estimates in the October 2015 World Economic Outlook, one US dollar could on average buy 19.4% more euros and 14.6% more Japanese yen in 2015 than it did in 2014. The appreciation of the dollar against the currencies of several large emerging market countries was even more dramatic. The dollar strengthened 57% against the Russian ruble in 2015, and 38% against the Brazilian real, for example.
As a result of this US dollar appreciation, the US dollar value of GDP has fallen sharply across the world, even in countries where GDP has grown at a hefty pace in domestic currency terms. If the currency of a country weakens against the US dollar, the dollar value of that country’s GDP will decline mechanically. Table 1 below provides a numerical illustration of this for a selected number of countries. For instance, the table documents that Eurozone GDP dropped 14% in US dollar terms but rose 2.7% in euro terms, with even more dramatic differences between domestic-currency and dollar GDP for Brazil and Russia.
Table 1. Nominal GDP in U.S. dollars, euros, and local currency units
Source: October 2015 World Economic Outlook Database.
And of course if we were to measure world GDP using a different currency as a numeraire, the series would look very different. For instance, in 2015, world GDP measured in euros expanded 13.6% while declining 4.9% in US dollars.
Bottom line: The decline in the dollar value of ‘planetary GDP’ simply reflects the 2015 increase in the value of the US dollar, not calculation errors or inconsistencies between real growth, inflation, and nominal GDP projections. The choice of numeraire matters in measuring nominal GDP growth, especially in years with very large currency movements such as the ones we have seen this year.
- van Bergeijk, P. (2015), “We are shrinking! The neglected drop in Gross Planet Product”, VoxEU.org, 7 December.
- IMF (2015), World Economic Outlook, Washington, DC.
About The Athours
Oya Celasun is Chief of the World Economic Studies Division of the IMF’s Research Department. Previously she was the IMF’s mission chief to Uruguay and worked as an economist and deputy chief on the United States and Canada desks. She was published numerous academic and policy papers on issues related to public debt sustainability, sovereign risk and corporate debt, inflation in emerging market economies, and the costs of unpredictable aid flows in low-income countries.
Gian Maria Milesi-Ferretti is Deputy Director in the Western Hemisphere Department of the International Monetary Fund. He received his Ph.D. from Harvard University in 1991 and joined the London School of Economics thereafter. He has been at the IMF since 1993, and is currently mission chief for the United States. He spent many years in the IMF’s Research Department, where he was responsible for the preparation of exchange rate assessments for major advanced economies and emerging markets, as well as research on global imbalances and international capital flows. He has published extensively in refereed journals in the areas of international capital flows, international financial integration, current account sustainability, capital controls, taxation and growth, and political economy. Since 1996 he is a Research Fellow of CEPR.
Maurice Obstfeld is the Economic Counsellor and Director of Research at the International Monetary Fund, on leave from the University of California, Berkeley. At Berkeley, he is the Class of 1958 Professor of Economics and formerly Chair of the Department of Economics (1998-2001). He arrived at Berkeley in 1991 as a professor, following permanent appointments at Columbia (1979-1986) and the University of Pennsylvania (1986-1989), and a visiting appointment at Harvard (1989-90). He received his Ph.D. in economics from MIT in 1979 after attending the University of Pennsylvania (B.A., 1973) and King’s College, Cambridge University (M.A., 1975).