The Directorate-General of Budget, Accounting and Statistics announced in the middle of last month that Taiwan’s economy contracted 8.36 percent year-on-year in the last quarter of last year.
The “year-on-year” approach to comparing annual GDP growth is favored by many developing countries. Advanced economies, on the other hand, prefer to work out the quarterly growth rate by comparing real GDP for a given quarter with that of the previous quarter and then calculating the quarter-to-quarter annualized rate in accordance with compound growth to better reflect the latest trend in the economic climate.
The US Department of Commerce announced late last month that the economic growth rate had fallen drastically to minus 6.2 percent for the last quarter of last year rather than the predicted minus 3.8 percent.
This figure is the quarter-to-quarter annualized rate, which gives the most up-to-date reflection of the state of the US economy and the degree of recession.
Thus, based on the value of the US dollar in 2000, the US’ real GDP contracted 1.6 percent from US$11.724 trillion in the third quarter of last year to US$11.525 trillion in the first quarter of this year. This percentage is the quarterly growth rate.
With the calculation of compound growth, it represents a quarter-to-quarter annualized rate of minus 6.2 percent.
This is the figure given in English-language media for the US economic growth rate for the last quarter of last year.
If the US were to employ Taiwan’s calculation method, its economic would be reported as having contracted only 0.82 percent year-on-year in the last quarter of last year, which fails to represent the seriousness of the situation.
Such a slight contraction could hardly reflect the serious decline that actually took place in the US economy in the last quarter.
On the other hand, if Taiwan were to employ the US calculation method, its economic growth rate for the last quarter of last year would be close to minus 20 percent.
In other words, Taiwan’s real GDP contracted 5.4 percent compared with the previous quarter and this figure can be converted into a quarter-to-quarter annualized rate of minus 19.9 percent in accordance with compound growth.
This figure shows the real seriousness of the decline.
To get a global picture, I have compared the economic growth rates of the four Asian tigers and the world’s leading economies in accordance with the two different reporting methods described above, as favored by developing and developed countries respectively.
The quarter-to-quarter annualized rate reflects the current state of an economy more accurately than does the year-on-year figure.
Overall, the situation in East Asia is more serious than that in the US or Europe. As for China, although its economic growth rate for the last quarter of last year was 6.8 percent year-on-year, in fact its economy can be judged to have been stagnant or even in recession when compared to the previous quarter.
I must also point out that, in Taiwanese media’s business news, reporters have been known to mix up figures for annual economic growth rate with the quarter-to-quarter annualized rate.
This practice leads to false comparisons that may mislead the public and it should therefore be corrected.
Hwan C. Lin is a research fellow at the Taiwan Public Policy Council and an associate professor of economics at the University of North Carolina.
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