Grading GDP

The iniital estimate of the real GDP growth rate for the second quarter will come out Friday morning, and it is useful to have a metric to put it in perspective. So, here's a letter grade scale:

• A - 5.4% or higher
• B - 3.5% to 5.3%
• C - 1.6% to 3.4%
• D - 0.1% to 1.5%
• F - 0.0% or less

This isn't a perfect scale, but it's a start.

I constructed this by taking real GDP growth rates from the first quarter of 1983 to the first quarter of 2005 (let's face it, few people remember anything macroeconomic before the 80s boom). I then converted them into percentiles. I then followed a grading curve that I was given in my first college course in 1981:

• A - 83rd percentile or higher
• B - 50th to 82nd percentile
• C - 17th to 49th percentile
• D - 6th to 16th percentile
• F - 5th percentile or lower

Note that this sort of scale shows some grade inflation: an average score will get you to the C+/B- borderline. Last quarter's 3.8% growth would have been a solid B- (which sounds just about right to me).

Comments

[Dave Meleney]

Great way to look at growth. Suggests that with better policies some countries could become consistent "A" students. Tho the grades countries'll be getting may waver a lot more than that of most students... they will largely depend on the quality of the policies. China seems to be getting A plus for at least 110 out of the last 120 quarters... and yet so many seem to expect them to take down some F's real soon!

[David Tufte]

Sorry Dave - I didn't notice this comment earlier.

I don't know that we've got a set of policies that would get us A's consistently anywhere. I think for that sort of policy-oriented cross-country comparison, I'd call an A any quarter in which you beat your population growth by some small cushion (like say 1%). That would be about 3% in the U.S. That wouldn't be quite the same as what I suggested above, but it would make the point that we haven't seriously screwed up the macroeocnomy in a long, long time.

As to China, one of the problems with this sort of system is that it doesn't account for the implications of growth theory that poorer nations should grow faster. So, yet I'd give China A's, but my criterion for them to get an A would be much higher (but would decline as they got richer).

[Dave Meleney]

Great congratulation on your remarkable success with educational autonomy! But back to grades: Isn't any grading system somewhat arbitrary...but often very useful nonetheless?

Even though our economy is rife with various grading systems... it would still be very good for a Treasury Secretary and a President to expect a GNP grade to appear with great fanfare out of Cambridge or SUU sometime in February of each year.

More importantly, what if Presidents of poor countries were able to crow about an A or an A+ at Davos or the UN? These leaders already keep up on how many palaces and Swiss accounts their peers have, how long shall those remain the primary measures in most poor countries?

Do poorer countries ACTUALLY grow so much faster than others? If so, why not devise grade scales for poor countries and middle ones...and then when a country graduates it becomes a big deal like in European soccer?

Currently, do my neighbors in Denver have any idea what has been going on in Vietnam and Ireland, or who is responsible? Is it foolish to think that people around the world would want to know about the AMAZING accomplishments of Tran Duc Luong if given the appropriate info? http://en.wikipedia.org/wiki/Le_Duc_Anh http://commons.wikimedia.org/wiki/Tran_Duc_Luong

[Dave]

I think this would be most useful for mitigating the spin put on the numbers by most analysts. Using my second grading scale - that matches what is faced by college students - Bush has pulled a 3.5 each of the last 3 years, and a 3.0, a 2.75 the two previous years, after a lousy freshman year.

I'm cynical enough to believe that the adoption of a grading scale like this by the UN would be quickly corrupted, since the countries with low grades have the most votes.

Yes, poorer countries can grow that much faster than developed nations - up to 5 or 10% per year.