Mahfi Eğilmez: Is the increase in per capita national income real or an illusion? A striking detail about refugees

Economist Mahfi Eğilmez has written an article regarding Turkey's growth figures and per capita national income. 

Eğilmez stated the following in his article:

REAL OR AN ILLUSION?

It is possible to briefly define the inflation measure that has recently entered the economic lexicon as "inflation perception"—which was initially used by TurkStat as "felt inflation" and later changed to "perceived inflation" because it became a subject of criticism and even humor in the media—as the inflation rate perceived by people. The inflation rate determined by surveys conducted by the country's statistical agency on consumers turns out to be higher than the inflation rates announced in many countries around the world. In other words, the person on the street believes that the inflation they experience is higher than what the statistical agency announces.

The Turkish Statistical Institute (TurkStat) announced the felt inflation rate for 2023, a year in which measured inflation was 64.8 percent, as 96 percent. The 96 percent inflation rate announced as felt inflation is actually nothing more than the GDP implicit deflator calculated for 2022.

According to TurkStat's statements, Turkey's GDP, which grew by 4.5 percent in 2023, appears to have risen to 26.3 trillion TL (1.119 billion Dollars), and its per capita income to 307,950 TL (13,110 Dollars). In 2022, Turkey's GDP was 906 billion dollars. Since the GDP rose to 1.119 billion dollars in 2023, this means an increase of 23.5 percent in dollar terms in one year. In 2022, per capita income in Turkey was 10,655 dollars. Accordingly, our per capita income has also shown an increase of 23 percent in dollar terms in one year. Since no one has felt such an incredible increase in income, are these increases real, or is there an illusion of the kind we are now very accustomed to?

To answer this question, let's first look at how GDP is calculated. In an economy, GDP via the production approach is first calculated at current prices, that is, at prices valid in the market. The quantities of all goods produced and services offered in the economy in a year are multiplied by their sales prices, and the resulting values are summed to obtain GDP at Current Prices (this is called GDP at current market prices.)

Let's imagine an economy that only produces bread and cheese and has a population of 100. Let the average Dollar / Lira exchange rate in this economy be 3 in 2022. In this case, the 2022 GDP at current prices and per capita income in this economy are calculated in Lira and Dollars as follows: Accordingly, the 2022 GDP at current prices is 50,000 USD and the per capita income is 500 USD. 

"LET'S ASSUME REFUGEES ARE NOT INCLUDED IN THE POPULATION"

Let's assume that 10 refugees arrived in the country in 2023, that they were employed in the production of bread and cheese, that there were increases in both the production quantity and prices of bread and cheese with their contribution, that the average dollar exchange rate was kept under pressure at 3.3 instead of the 3.5 it should have been, and that these refugees were not included in the population. In this case, our table would be as follows:

"PER CAPITA INCOME APPEARS TO HAVE RISEN"

Accordingly, the GDP of this economy increased by 30 percent in 2023 compared to 2022 at current prices [(195,000 – 150,000) / (150,000)]. This increase covers both the increase in production and the increase in prices. That is, it has not been adjusted for price increases. Furthermore, since GDP is divided by a population of 100, excluding refugees, per capita income appears to have risen from 500 dollars to 591 dollars.

Now let's assume that the dollar exchange rate was not suppressed in 2023 and was realized at 3.5 according to market movements, and that the 10 refugees were included in the population for the personal income calculation. In this case, our 2023 table would change as follows:

"WE COULD NOT GIVE UP THESE ILLUSIONS THAT MAKE THINGS LOOK BETTER"

Accordingly, the dollar exchange rate, which was not kept under pressure, reached where it should have been, and GDP and per capita income were calculated in accordance with the facts by taking refugees into account. A calculation in accordance with the facts shows us that while GDP at current prices increased by 30 percent, per capita income increased by only 1.2 percent.

I have explained several times in the past that in economies where inflation is very high and the exchange rate is suppressed, GDP and per capita income increases do not reflect the truth, and these high increases consist of nothing but an illusion (https://www.mahfiegilmez.com/2013/04/gercekte-ne-kadar-buyuduk.html.) Suppressing the exchange rate to achieve this situation, which aims to make the economy look better than it is, created a fake paradise in the country between 2004 and 2014. However, this fake paradise later turned into a hell. We have experienced this problem many times but have failed to learn our lesson, and we could not give up these illusions that make life look better than it is.