Currency fluctuations are factored into existing measurements of productivity, writes Robin Johnson.
The Independent, November 28, 2007, page 18.
Tnere seems to be some confusion among readers of The Independent Financial Review and others about the role and measurement of productivity in the economy. Martin Verry's article (September 12), for example, is based on a misunderstanding of what productivity does and does not measure.
The concept of productivity starts with a simple input/output ratio such as milk solids per cow or output per labour unit in a firm. On an economy-wide basis, output is measured by real gross domestic product in the national income statistics. This is the sum total of all value-added activities in all the firms in an industry - value added is equivalent to some measure of total output of goods produced less materials bought or transferred from other firms.
The measure of real GDP has already taken out all price effects, including those caused by exchange rate fluctuations.
Over time changes in prices are eliminated by isolating the volume of goods involved in such a calculation. The bottom line can be represented by the physical number of people employed to represent total labour input or some physical measure of capital employed in the production process such as the real stock of capital in use at anyone time. When economists talk about multifactor productivity they mean an input output ratio with real value added on the top line and a weighted average of labour and capital input on the bottom line.
The Ministry of Agriculture and Forestry (MAF) publishes productivity statistics for the agricultural production, the agricultural processing, the forestry growing and the forest product processing sectors.
Statistics New Zealand publishes productivity for a large part of the national economy known as the measured sector. This excludes government services and some personal services. These productivity ratios are estimated and published by both organisations.
Now Marty Verry says in his article that the MAF measure of productivity for the wood processing sector is incorrect because it does not include the effects of exchange rate fluctuations - the main item of interest to producers like him. He suggests the data should be zerobased with regard to the exchange rate.
The economists' answer to this is the measure of real GDP has already taken out all price effects, including those caused by exchange rate fluctuations. What remains is a measure of the real added value of the goods produced in a given period.
If Verry wished to extend the analysis in the way he describes an economist could work out a series for value added which showed separately what the nominal value would have been in the national income statistics at certain levels of the exchange rate; say, what they would have been if the exchange rate stayed the same as it was at the beginning of the period concerned.
This would involve economists asking Verry and his colleagues what different production decisions would have been made if such and such was the stream of income they would have received. This is a form of economic modelling altogether more complicated than estimating the productivity ratios from the national income data. Perhaps Verry would be willing to pay for it.
Robin Johnson is a former deputy director of the economics division of the MAF.