How GDI Is Measured – And How Those Measurements Are Flawed

Exporting and importing are, essentially, the defining financial exchanges of global commerce. Without which there would be no global trade, no exchange of goods between countries and therefore no global economy. However, it must also be understood that there are many ways in which these processes can go wrong. We will now consider three of the most common mistakes made during import and export.


The first mistake that is commonly made is that of currency devaluation. This happens when a country’s currency drops against its own currency to make its exports more affordable to the world market. If this occurs then imports are usually made at a lower price so that they become cheaper for both exporters and importers than those products that were imported previously. It is important for all nations involved in global trade to avoid this eventuality.

Another common mistake is that of zeroing in on only the gross domestic product (GDP) of a country as a measure of the value of the country’s imports and exports. The values of both imports and exports are determined in terms of the quantity of actual exports and imports, while taking into account the values of principal components of the exports and imports. For example, if the country’s total exports consist of machinery worth five hundred million US dollars and its net imports consist of agricultural raw materials worth two hundred million US dollars then its value as an import is (5.4 * 100 million US dollars) * (2.4 * 100 million US dollars). Therefore, if the government of the country wishes to calculate its national income on the basis of GDP alone then it would have to include the value of its foreign assets, which may be either equities or foreign currency reserves held by the government.


The third common error is that of failing to appropriately adjust for price fluctuations between countries. Most people who calculate the values of their exports and imports assume that they are fixed. Goods imported from one country will always cost less than goods exported from the same country, irrespective of the exchange rates. Similarly, goods priced at zero over the world market are not imported but substitutes for the goods imported, and so their prices are irrelevant for the calculation of national income on the basis of exports and imports. The time lag between the entry of a good into the domestic market and its exit out of the domestic market also plays a very important role in determining the measurement of national income and so it should not be ignored.


The fourth mistake is the calculation of the quantities of imports and exports that take into account the values of principal components of the exports and imports. There is a very wide range of values of primary exports and imports in the real trade scenario. Their values will vary according to the direction of trade flows and their determinants like population growth, political and economic developments, and the location of the shipping lanes. It is estimated that approximately two to three billion dollars worth of secondary exports and imports are re-exported by developing countries each year. Some of these items include capital goods, petroleum products, petroleum gas, automobiles, pharmaceuticals, machinery and equipment, non-monetary assets, and patents.


Thus, it can be concluded that a large number of errors are involved in the current practice of measuring gross domestic product (GDP). Some of the errors are common, while others are specific to particular sectors. In order to improve the accuracy of current GDI methodology, various measures need to be improved. One possible measure that could be used would be the measure of exports and imports as determined by the United Nation’s World Value-of Petroleum Data.