How to create income like magic

Why are government statistics in Kazakhstan truly incredible?

Great news!  Despite anti-Russian sanctions and anemic global prices for oil, average income in Kazakhstan is rising 14% per year.  That would make it one of the world’s fastest-growing economies…if you could believe the government.

Unfortunately, you probably can’t.  I’ll explain.

Nominal income per person, measured in tenge, is not the best measure of prosperity, since it can rise because of growth in either output or prices.  Real income subtracts price increases, reflecting only growth in output. It measures purchasing power and thus prosperity.

As a simple example, consider an economy that produces only bottled water.  The price is 100 tenge per liter.  If average nominal income is 200 tenge, then a typical person can buy two liters of water, which is real income.  If nominal income doubles to 400 tenge, and if the price also doubles, to 200 tenge per liter, then the person can still buy only two liters.  Although nominal income has risen by 100%, real income has not changed.

Now suppose that nominal income doubles to 400 tenge but that the price remains at 100 tenge per liter.  Then your new income can buy four liters rather than just two.  Real income has increased by 100%.

In short, the growth rate in real income roughly equals the growth rate in nominal income minus the growth rate in prices.  If nominal income rises by 8%, and prices rise by 6%, then real income rises by about 2%.

Now we can discuss the news.  A few days ago, quoting the government’s statistical committee, the business newspaper Panorama said nominal income per person was rising 8.4% per year.  Inflation – the average rate of increase in prices for all products – was something like 5% or 6% per year.  One should conclude that real income per person is rising in the neighborhood of 2% or 3% per year, depending on the precise rate of inflation, which was not reported.

However, according to the weekly newspaper, real income per capita is rising 14%.  Evidently, someone calculated growth in real income by adding the inflation rate to the growth rate of nominal income.   

In principle, either Panorama or Kazakhstan’s statistical committee could have pulled this boner.   But given that Panorama, like most newspapers in Kazakhstan, intones government press releases as if they were the Word of God, the error probably came from Astana.

So don’t plan your Mediterranean vacation just yet.  You may not be as rich as the government thinks.  –Leon Taylor tayloralmaty@gmail.com

       

References

Panorama.  Tovarooborot Kazakhstana so stranamy TS v 2014 godu pashul na snyzheni.  (Kazakhstani trade with the other countries of the customs union in 2014 tends towards decline.)  September 19, 2014.