Explain why during an economic downturn, U.S. GDP might actually be underestimated while Chinese GDP might actually be overestimated.

Question

Quizplus · Accepted Answer

The Answer is Local authorities in China have been rewarded/promoted based on how well they meet numerical growth targets. Since GDP data is based on output (value-added production) primarily in China (rather than expenditures) and so there is a tendency for local officials to report more output in bad times so as to appear to be meeting the Five Year Plan targets. Meanwhile in the United States, bonuses are typically not rewarded during a recession, but are during an upturn-the same story applies to tax payments. Thus, managers at companies attempt to shift costs into bad years so as to sweep all the bad news into years where it will not matter anyhow. This tends to make the bad year look worse than it actually is.

Explain Why During an Economic Downturn, U