Expert: Warren D. Miller, CFA, CPA, ASA - 6/13/2009

Question
QUESTION: Dear Warren D. Miller:

Be so kind to ask my question below.

I am confused with GDP per capita calculation. As i know it should be like following.

Conditions: GDP (projected 2009) is $ 43.65 billion. Inflation(2008) is 20.2 percent. Population of the country is 8.6 million (0.086 billion).  

My calculation: 43.65/0/086=507.56 Taking into account an inflation I deduct it from the amount i have gained i.e. 507.56-(507.56*0.202)=405.03

Question:
I have taken the condition mentioned above from IMF statistics and after their economic figures they show GDP per capita (2009 projected)which is $ 7,143 (not 405.03 that i have calculated). What wrong have i done?

Thank you in advance

Regards,

Aytan


ANSWER: Hi, Aytan--

Thank you for your question, and thank you for using AllExperts.com. I'll be glad to help you.

As I see it from here, I think you made two small errors, but they were enough to take your computation for off-course. When you're dealing with big numbers--and GDP is, like most macroeconomic measures, usually a big number--then even one small error can take you far from where you need to be.

Your first error was assuming that 8.6 million = .086 billion. That's not accurate - you missed it by a magnitude (magnitude = 1 power of 10). .086 billion = 86 million, not 8.6 million. So you divided by a number that was 10 times the size of what you should have divided by, .0086. As a result, you got a number that was 1/10 of what it should have been.

Your second miscalculation was in 'deflating' your computation by 20.2%. GDP is expressed in "nominal" terms, not "real" ones. In other words, it includes inflation. You excluded it. So that reduced your already-too-low number even more.

Now, when I do the computation for 2009, here's what I get:

$43.64 B / 0.0086 B people = $5,076 per capita. There is no adjustment for inflation.

Unless I know which country you're talking about--and I can see that it is NOT Greece!--there's not much more I can do. Please send me the country, and I'll try to take our conversation a little further for you.

Take care, and best regards--

Warren

---------- FOLLOW-UP ----------

QUESTION: Dear Warren D. Miller:

Thanks for prompt reply. I am sorry for making a rude mistake. As my answer, before inflation should have been 5,075. It was mechanical error. Sorry again. But still answer is not the same. 5,075 vs 7,143.
Yes, you have clearly pointed. I am from Greece, studying here and my thesis is about my home country which is Azerbaijan. Be so kind to explain the difference of figures above.
Thank you

BR,

Aytan

Answer
Got it, Aytan. The country is Azerbaijan.

OK, the first thing is that I think your estimate of the population of Azerbaijan is a little high. From this link, http://www.indexmundi.com/azerbaijan/population.html, it appears to me that the population is about 8.2 million, not 8.6 million. So that will increase the $5,076 figure to $5,349. I see from that same link, however, that the IMF says the population was 8.62 million @ the end of 2008. The difference between 8.2 and 8.6 is sizable - about 5%. In statistics and demography, that's a BIG number. I have no idea what the correct population figure is.

I can tell you that, according to the World Factbook of the U.S. Central Intelligence Agency (link: https://www.cia.gov/library/publications/the-world-factbook/geos/AJ.html), Azerbaijan's population as of 7/2009 is expected to be 8.24 million. So it appears that the IMF figure is likely too high. It also says there that the 2009 population growth is expected to be 0.76%. So, when I divided 8,238,672 by 1.0076, I get a population figure of 8,176,360. Looks to me again as if the IMF's population number is much too large.

That same link under the "Economy" section says that Azerbaijan's 2008 GDP was estimated at $53.26 billion; that's based on the "official exchange rate." Under what is called "purchasing power parity" (definition: https://www.cia.gov/library/publications/the-world-factbook/docs/notesanddefs.html?countryName=Azerbaijan&countryCode=AJ®ionCode=me#2001), which appears to be a MUCH better measure of per-capita welfare, its 2008 GDP was $73.65 billion.

Now, let's divide 2008 GDP by 2008 population, according to the preceding figures. $73.65/.008176 = $9,008 per capita. If you're look for a number to hang your hat on, Aytan, that's the one I'd use. In my experience, IMF data are usually biased to make it look as if a given country needs more IMF "help." Understating GDP is consistent with my experience w/IMF data.

I hope I've shed some light on this for you. Please do me the honor of completing the 'rate-the-expert' email you'll receive at about the same time as you get this reply from me. Your ratings and, especially, your comments help me do a better job of helping folks like you who ask such interesting questions!

Take care, and best regards--

Warren