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Monday, April 1, 2013

Comparing macro variables

Comparison of economic achievements under various governments is a complicated effort. There is no direct way to measure it because of time inconsistency problem. Why it is? Say, in reality, time series variables have a trend to move upward, or downward. There is a strong possibility, in most of the cases it is the truth, the effort of governments rarely reflects the movement of variables. Lots of issues are interconnected, and unless one is not closely inclined to basic economics and econometrics knowledge, they will rarely explore such issues.

Let us know a few clarifications. First of all, for example, there are two parties, who come to the power on consecutive periods. Let’s assume that there are 3 periods, Period 1, Period 2 and Period 3 and two parties: Party A and Party B. As mentioned earlier, macro variables have a trend and move accordingly. Now, if one macro variable, say, real GDP growth, moves upward with time under three consecutive governments when two parties was in the power one after another (Table below), then it will be silly to make a statement like such: rise in real GDP growth took place because this party was in power at that time. Basic economic knowledge won’t tolerate this sort of novice statement. For those, suggestion would be to review Macroeconomics 102 again.            

Party in the Power
Period 1 (5 Years)
Party A
Period 2 (5 Years)
Party B
Period 3 (5 Years)
Party A

Secondly, a common suggestion would be: rather observing development in macro variables for comparisons, one may look for a policy based economic analysis, through which making comparison of policies taken by various governments is possible. Say, if the price of cell phone is Tk5000 under Period 3 (Table above), reduced from Tk10,000 under Period 2, then Party A can’t claim that during their period, prices went down as compared to what was the price during Period 2 where Party B was in power. Party A can only claim such if prices reduced due to policy shifts taken by Party A during Period 3.     

Third, this is again basic economics knowledge: an achievement in Period 3 doesn’t necessarily mean that it is the effect of policy actions taken in Period 3. In reality, development in macroeconomic variables follows lag actions and usually it takes several periods before getting the actual results of a policy action taken by a particular government.  

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