Letters: Macroeconomics maya

We have read in economics about how nominal values do not reflect reality. People often have a money illusion, in which they may feel better off with a rise in their nominal incomes, although their real incomes, or the purchasing power, might have fallen owing to inflation. Economists take care of such an illusion when they compile the real gross domestic product (GDP), or the net of inflation, to reflect the true underlying value of goods and services produced in a year. But, in my view, even that is illusory. Think of the enormous amount of funds squandered and misappropriated in various schemes, and without any tangible result. Under the expenditure approach to the compilation of national income, all this money is supposed to contribute to GDP. Second, in the case of works like the laying of roads, what is counted as capital formation is really patchy, lasting for just one rainy season. It is in the nature of current and not capital expenditure. It should, therefore, be deducted from capital formation to arrive at the net figure. Third, wages under the Mahatma Gandhi National Rural Employment Guarantee Scheme are in the nature of a dole in many cases without any significant output, but still are considered as contributing to rural development for GDP. Fourth, the annual increments in salaries of employees get counted in GDP, although there may not be any change in their contribution or non-contribution to output. Is there some expert who could comment on these illusions and say what adjustments could be made to arrive at the true figure?

A Seshan, Mumbai

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