How Reliable Are The Leading Indicators Of GDP?

 Gross Domestic Product (GDP) is the total monetary or market value of all the finished
goods and services produced within a country's borders in a specific time period.
 One of the key applications of GDP, is its ability to help policymakers to get a sense of
recession risks early enough. As an example, Term spreads is an important leading
indicator of recession risk in advanced economies. Thus, when long-term bond yields go
below short-term interest rates (inverted yield curves), they are seen to be among the best
signals of recessions. In India we have experienced a steepening yield curve since 2018,
even as other indicators indicated a cyclical downturn. This helps RBI, to lowered its
policy rates since January 2019 to encourage borrowing.
 Based on various information from Internet, we summarized below key issues with GDP
as a leading indicator.
a) Globally countries following inflationary-focused monetary regimes today, central banks
may be lulled into a false sense of security by lower inflation, dropping guard and failing
to focus on monetary and credit aggregates that may call for active policy responses to
growing financial imbalances. This suggest an evidence for a shift from inflation-induced
to financial-cycle induced recessions in the countries.
b) A recent study in India, uses a set of financial sector variables like real (non-food) bank
credit, credit-to-GDP ratio, real equity prices, real effective exchange rate, and real house
prices for analysis. Interestingly, they find no causal relationship between financial cycles
and conventional business cycles, even while there appears to be a strong association
between long-term cycles in economic and financial activities.
c) Such inability of financial cycles and term spreads encourage to come up with an
alternative leading indicator for the economy. Such an indicator would need to be a
composite index, considering both financial sector variables, as also early stage indicators
and market expectation-based indicators.
d) Gross domestic product, or GDP is not to say that it is the best indicator of quality of life
—people may be happier producing vegetables in a beautiful landscape than earning
twice as much but being suffocated by clouds of smog from a nearby factory.
e) The GDP of a country in current US$ measures the size of its economy in a unit that
changes somewhat arbitrarily from year to year. The figures are suitable for comparison
of different countries in a given year (you can see which country has a “bigger”
economy), but they are pretty much useless if you want to compare different years.
f) The ordinary GDP per capita tells you how much money there is in the economy per
person, on average. However, from an individual point of view, it is better to earn $1000
and spend $500 a month on basic needs than to earn $2000 and spend $1800 on basic
needs. That’s where PPP (purchasing power parity) conversion comes into play. As per
PPP, look at how much food, utilities, electronics, housing, etc., you could buy with the
given amount of money in that country. Then you calculate how much all these products
would cost in the United States, on average, and that’s the original sum converted to
dollars, PPP. This is the best type of GDP to use if you want to compare standards of
living between countries. For example, the GDP per capita of Qatar was $59,330 in 2016,
only 60% of that of Luxembourg. However, Qatar’s GDP per capita, PPP, was $127,522,
the highest in the world and almost 30% more than that of Luxembourg. The reason is
that Luxembourg is a much more expensive place to live in.