Monday, January 05, 2009

GDP will grow by 7.23413% next year

In a panel discussion in which some usual suspects participated, I heard confident predictions on next year’s GDP growth, ranging from 6-9%. One of the panellists was quite specific. “I expect the GDP to grow in the range of 7 to 7.25%” he said.

Now, the total GDP is an aggregate of the individual GDP of the manufacturing, agricultural and service sectors, each of which in turn has several components. So, the statistics need to be compiled bottom-up and painstakingly to arrive at the aggregate. There are central agencies entrusted with this task. It is not a figure that can be arrived at by conjecture.

On the other hand, there is the Gestalt factor. This is the capacity of the brain to form a holistic picture at once, rather than going through the process of adding up lines and curves. This is often used in perception surveys. Airlines may ask you specific questions relating to check-ins, cabin temperature, food, service, etc and finally ask you a global question, “What was your total experience?” The answers to the individual questions may not necessarily add up to the answer you provide for the global question. Quite often, the top-of-the-head answer that you provide against the global question may reflect your honest views.

Sensex is another index that is calculated on the basis of aggregation. So, when someone – even if an acknowledged expert- says confidently that he expects Sensex to touch 15000 or 20000, it is possible that he could be right, but not probable.

When some corporate bigwig proclaims, with that air of supreme confidence, that the GDP growth next year will be 7.234%, he has absolutely no basis (except the Gestalt theory) for making that assertion. What he hopes for is that the air of confidence that he exudes will act as the perfect smoke screen for his ignorance.

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