The FINANCIAL — Measuring economic developments is often a laborious business. Consider, for example, the Consumer Price Index (CPI). One first has to define the so called consumption basket that contains the goods and services whose prices you want to track.
These goods and services have to be represented in the basket in the right proportions, reflecting the consumption patterns of an average consumer. Unfortunately, consumption habits change over time, and product characteristics change even more. A personal computer 10 years ago is obviously a very different object than a new one. Would it be right then to treat an old and a new computer as the same product, just comparing the prices now and then?
No, say economists, and compute a so called Hedonic Price Index that takes into account technological advances. If a modern computer is much more powerful than an old one, but in their heydays both are sold at the same nominal price, then in fact deflation took place. Prices did not change, but computers are still much cheaper today than they were 10 years ago.
The desire to simplify, often an outgrowth of plain laziness, has driven human inventiveness throughout the ages. Economics is no exception. Certainly, economists want to do things as economical as possible. Can we measure inflation without computing the CPI?
At ISET we found the Khachapuri Index, and one can read in this newspaper every week how it enables us to approximate price 
developments pretty well. Our index is based only on the prices of Khachapuri ingredients, and without employing a huge statistical apparatus, we get pretty good estimations of inflation rates. That is of course not to say that the statistical authority of Georgia could rely on Khachapuri prices for their inflation tracking.
There are other examples of these ingenious shortcuts taken by economists. It is an intricate issue to compare the average income of people in different countries. Unfortunately, it is not enough to just consider what people earn in their currencies, apply nominal exchange rates, and translate everything into Dollar amounts. The price levels in different countries are different, and for example one Dollar in Georgia buys much more of most goods than a Dollar in the United States. Standard economics solves this problem by calculating the so called purchasing power parity, again relying on a basket of goods and comparing their prices in different countries.
As it turns out, for a rough estimation much of this work can be saved if instead one picks one single good and compares its prices throughout the different countries of the world. Obviously, such a product must be truly equal all around the world, and making it should draw on inputs from the country where it is produced. What could it be?
The magazine The Economist found such a good: McDonald’s Big Mac. McDonalds operates in 121 countries of the world, and in each of these countries they offer Big Macs (in those places where pork meat is banned, Big Macs are made from chicken meat). So instead of finding the basked of goods and services one can buy for the same amount money in different countries, one only looks at how many Big Macs can be purchased. For fifty Dollars, for example, one can buy 30 Big Macs in India and just 8 in Sweden. Unfortunately, Georgia is not covered by this ingenious index, but one could easily calculate it by ordering a Big Mac in the next best Tbilisi McDonalds restaurant.
The showcase of economic measurement, however, is economic growth. Doing it thoroughly demands immense resources – statistical offices have to evaluate huge amounts of data that mainly come from the fiscal authorities. Because many of these data are lagged, official growth numbers may be adjusted long time after they were published for the first time. Can we find an economical solution also in this case?
ELECTRICITY – AN INPUT OF EVERYTHING
If there was a production factor essential for virtually every production, then we could expect to observe a close correlation between the demand for that factor and overall economic activity. Could electricity consumption in Georgia would be a good indicator for the economic well-being of this country?
The relationship between growth and electricity consumption was found in various countries during different time periods (see, for example, A. Shiu and P.-L. Lam, Electricity consumption and economic growth in China, Energy Policy 32, 2004)). For Georgia, the chart reveals that in 2009, a year after the Georgian-Russian war and in the period of the global financial crises, electricity consumption reached it minimum in the last decade. The same is true for the Georgian Gross Domestic Product (GDP). In the recovery period we observe fast growth in the demand for electricity and at the same time also the country’s GDP grew, though with lower rates.
The second chart presented here shows that the use of electricty is also positively correlated with the value added tax (VAT) revenue. Like GDP, VAT collection in increasing since 2010.
ECONOMIC DOWNTURN OR NOT?
Since the beginning of the year, ISET researchers have discussed whether the Georig is in a serious recession or whether it will soon return to the impressive growth path it followed in the last 10 years (see, for example, The Tides of Markets, by Giorgi Machavariani and Florian Biermann, published in the ISET Economist Blog).
Electricity consumption data becomes available promptly, while for the mentioned reasons, monitoring the GDP is always delayed. If we take electricity consumption as a proxy for growth, can we draw any conclusions relevant for this debate?
What is striking in the chart for 2012-2013 is that the electricity consumption in 2013 behaves almost exactly as in 2012. It is higher by about 6.5% compared to 2012, but in its dynamic it closely resembles the year 2012. This is true both for the electricity consumption and the related VAT revenues.
If we believe in electricity consumption as a serious indicator, then we might not be overly concerned about the recent GDP numbers. With a growth of 6.2%, the year 2012 was quite good for the Georgian economy.
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