Wednesday, August 14, 2013

Financial Journalists Need To Learn To Translate GDP Numbers

Imagine if American media reported about a heat wave in Southern Europe, with temperatures of 35 degrees or more . Most Americans would find it odd that they characterice 35 degrees as hot, I mean that's only barely above the freezing point.

Similarly, if Europeans learned about a heat wave in Las Vegas, with temperatures above 100 degrees they would be chocked. 100 degrees, how is it possible to survive in such heat, many Europeans would ask themselves.

Such misunderstandings don't happen of course, because Meterological journalists know that they must "translate" from Celsius to Fahrenheit and vice versa. And so when American meterologists talk about heat in Europe they say that it is 95 degrees, which is what 35 degrees Celsius is in Fahrenheit. Similarly, European meterologists reporting to European audiences of course reports that the temperature in Las Vegas was 38 degrees, as that is what 100 degrees Fahrenheit is in Celsius.

Unfortunately, financial journalists are too lazy to do similar "translations" of GDP numbers. When describing quarterly changes, the American statistics authority, the BEA, expresses them in annualized rates, which is to say, the yearly change that would happen if growth remained at the same level. By contrast, European statistics authorities simply state the quarterly changes, without trying to annualize them. That means for example that if GDP is 0.5% higher in a certain quarter compared to the previous one in both America and Germany, the BEA will say that growth was 2% while the German statistics authority will say it was 0.5%. Even though growth was the same in both countries, it will appear for the layman as if growth was 4 times higher in the U.S.

That is of course where competent financial journalists should come in and, when reporting to American audiences, report both U.S. and German growth as 2%, and when reporting to European audiences, report both U.S. and German growth as 0.5%.

How this can mislead is apparent in the reports about second quarter growth this year, which was reported as 1.7% in the U.S. and as 0.7% in Germany by the local statistics authorities. If reported untranslated, one could get the impression that growth was 2.4 times higher in the U.S. even though in reality it was 1.7 times higher in Germany.


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