Page 16 - QEB_2_2016_lowres

The shortcoming in value addition does not end there. The entire $513 is counted
towards GDP in the US, but 40% of US corporate bonds and 15% of US equities are foreign
owned. The returns of these assets are in the hands of non-US domiciled persons and
one would expect that these returns are expatriated. So even though the expatriated
profits would contribute to the wellbeing of another country, it is still counted towards
GDP in the US, by the value-addition approach. In the case of the South African equity
market, foreign ownership of the JSE stands at around 40%, much higher than that of
the US. Corporate profits earned by firms on the JSE all count towards local GDP, even
though 40% of JSE returns contribute to the well-being of citizens in other countries.
GDP diverges from reality even more when the $236 iPhone is exported to tax free
countries such as Bermuda, or to a low tax country, such as Ireland at the cost of
production, then marked up to $700 before it is exported to a third country where it
is sold for $749. Gross Value Added or Gross Domestic Product in the transit country
would have increased by $474 without any addition to value other than an accounting
mark-up. This approach to GDP makes sense only to economists but very little sense
to the Bermudan who expects her well-being to have increased because GDP
reflected growth.

Gross National Product (GNP) or Gross National Income (GNI) does indeed discount
GDP for profits earned by foreigners that are not locally resident. GNP is not typically
as widely published nor as widely used in the determination of the health of the
economy as GDP. Ireland does calculate GNP, which is about 20% lower than GDP.
Counting GNP makes more sense for a country such as South Africa, that is so heavily
dependent on portfolio flows into equity and bond markets. GDP and GNP do not
always move in the same direction. Quarter 1, 2015 saw US GDP decline by 0.2% but
GNP increased by 1.9%. That is GNP increased by more than $300 billion at the same
time of a declining GDP.

Not All That Can Be Counted Is Important

12 QUARTERLY ECONOMIC BULLETIN 2016