If You Don’t Mind, Let Me Challenge You with 3rd Grade Math: Tunyanz on Economic Growth

The discussion around the budgeted 7% economic growth for 2020 and the government’s program targeting a 7-9% growth for 2021-2026 refers to the REAL economic growth indicators. Babken Tunyanz, a member of the National Assembly from the My Step Alliance, stated this on his Facebook page.

“Since many are asking about this separately, let me clarify. Both the budgeted 7% economic growth for 2020 and the 7-9% economic growth mentioned in the government’s program for 2021-2026 refer to the REAL economic growth indicators. That is, we are talking about economic growth adjusted by GDP deflator, without the effect of inflation. This has always been the case: whether in the past, present, or future, when we say ‘economic growth,’ we are talking about real growth. Why? Let me explain with an example. If you don’t mind, let me burden you a bit with 3rd grade math.

So, a farmer grows potatoes and tomatoes. Last year, he grew 500 kg of potatoes, sold them at 200 drams per kg, and 400 kg of tomatoes at 300 drams per kg. His revenue amounted to 220,000 drams. This year, he grew 520 kg of potatoes and 390 kg of tomatoes. However, prices have increased: he sold potatoes at 250 drams and tomatoes at 330 drams. His revenue this year is 258.7 thousand drams. In nominal terms, the farmer’s economy has grown by 38.7 thousand drams or 17.6%. If we didn’t know about the changes in the volumes and prices of potatoes and tomatoes, and relied solely on this 17.6%, our understanding of the farmer’s economic reality would be incomplete. We would think that there is rapid growth.

To fully understand, we need to apply comparable prices. Let’s calculate how much the farmer’s revenue would have been if he sold potatoes and tomatoes at last year’s prices. Or, hypothetically speaking, let’s adjust the revenue with a ‘deflator.’ It turns out to be 221 thousand drams (520 kg x 200 drams + 390 kg x 300 drams). Therefore, the real growth would be merely a thousand drams or 0.4%. We would understand that the farmer’s economy has not really grown by 17.6%, but can rather be said it hasn’t grown at all.

With exactly the same logic, the Statistical Committee adjusts our GDP growth for the entire economy, taking into account the changes in prices of all goods and services, and ‘cleans’ the effects of inflation to publish the real economic growth indicators. The same applies to the growth of individual sectors. Otherwise, we wouldn’t be able to understand whether the economy has genuinely grown or if it’s the prices that have changed. That’s why the publication of real growth indicators is important, regardless of whether they are good or bad. The aim of economic policy is real growth, creating additional value, and consequently increasing people’s well-being,” he wrote.