Character is what one is; reputation is what one is thought to be by others. Recently, the island of Bermuda (Bermuda Inc.) had its annual credit rating review performed by global rating agencies, such as Standard & Poor’s and Moodys. We received outstanding marks. The picture of Bermuda, Inc. looks very rosy according to their analysis of the country’s economy and Gross Domestic Product. Whether we choose to think about Bermuda as a corporation (subject to the ebb and flow of the world economies), we are a business in almost all respects just like any other.

We are, however, selling unique products and services, mostly services in the fourth most remote spot in the world.

Textbook economics defines Gross Domestic Product as the following: The measure of the output that is produced domestically; or more clearly stated as economic activity, which is the measure of all final goods and services produced with the domestic factors of production. A very simply paragraph that is full of significant meaning.

What do we mean by output? What do we mean by domestic factors of production? These are broad terms. In reality, we are no longer a country that produces in even a small measure (in a factory related sense) tangible items that can be sent elsewhere in the world.

What we sell /export as a country is more elusive and intangible. It can probably be summarised in a single connotation; we are selling / exporting our reputation.

The Gross Domestic Product Formulae (again in text book terms) are:

Expenditure approach = the sum of all the following

1. Personal consumption by households, generally this makes up the largest component of GDP.

2. Gross Private Investment (meaning expenditures of business in the economy). This is an extremely important component of the GDP formula because it is an indicator of an economy’s future productive capacity. Private investment is generally divided between investments in capital structures and inventories (if the company is a manufacturer).

3. The country’s Government consumption — purchases of goods and services, but note that transfer payments for social insurance, welfare and so on are not included in this number.

4. Net exports of goods and services — this is a measure of domestic production only, that is, domestically produced goods and services purchased by consumers outside the country minus total imports (foreign-produced goods bought by domestic — in-country — consumers.

Resource Cost-Income approach is a bit more easily understood. It is the sum of the entire country employee compensation, proprietor’s income, rents, corporate profits, interest income, indirect business taxes, depreciation and net income of foreigners.

The GDP formula has flaws. It does not count the value of homemaker services (just try coming up with the cost of a mommy or daddy on an annual basis); underground economies, such as illegal activities and tax evasion; the sale of second-hand goods; the value of leisure activities and changes in working conditions; the cost of pollution and damage to the environment; and most thought-provoking of all, there is no measurement the changing quality (good or bad) of goods and services.

Having put all of that down, what do these definitions mean to the average citizen of any country? GDP measurement does not track the welfare of a society or its people, for instance because there is no differentiation between spending a dollar on education or a dollar on food.

GDP as a Measure of Economic Activity. What GDP does do is provide current information on how a country economy is doing and the tracking of the performance of that economy. The measurement of a country’s GDP is one of many leading indicators that can alert analysts, governments, and economist of changes in overall economic activity and assist in forecasting economic trends, as well as in the complex process of controlling the cost of money flow, inflation/deflation, balance of payments, and interest rates.

The Consumer Confidence Index, one leading indicator, for instance, in the US while not a quantitative model of economic conditions, certainly is important for the perception of a country’s economic stability. Perception, after all, is what drives the consumer to be inclined / or disinclined to spend thus affecting — personal consumption — the largest driver of the GDP.

The rate of unemployment and inflation are two other key variables used to determine which of the four phases a business cycle is in, or is headed into.

Business cycles are assumed to run in ten-year loops, although that may not always be true in retrospect. Those cycles, which run from expansion to peak to contraction / recession and recovery do exhibit different characteristics in activity and indicators, as certainly do the citizens who are experiencing them.

Governments implement fiscal policies to leverage their ability to improve price stability, full employment, and economic growth by influencing the demand curve up or down to simulate or slowdown an economy.

Monetary policies are generally controlled by a central bank that pursues economic goals through the regulation of the supply of credit and money. Economy slowing down? Set an easy monetary policy by lowering the interest rate, decreasing the reserve requirement for banks and purchase Treasuries in the market. Implement the reverse for a runaway economy with implicit inflationary pressures.

Fine for text books, but how do smaller countries without a central bank track and control their economic output? That’s enough for today — look to the future for the rest.

Martha Harris Myron CPA CFP® is a dual citizen (Bermudian/US). She is a Senior Relationship Manager at Argus Financial Limited specialising in wealth management, capital preservation and comprehensive financial solutions for clients considering lifestyle transitions and rewarding retirements. Confidential email can be directed to marthamyron@northrock.bm or 294-5709.

The article expresses the opinion of the author alone. Under no circumstances is the content of this article to be taken as specific investment or financial planning advice, nor as a recommendation to buy/ sell any investment product. The editor of The Royal Gazette has final right of approval over headlines, content, and length/brevity of article.