How to Estimate the GDP Loss due to COVID-19

Many of my followers have asked a lot of queries about how to estimate the GDP loss due to a crisis such as COVID-19. In this blog, I illustrate a simple but scientific approach to calculate such loss.

To calculate the GDP Loss, we need : 

 1. The information about last year GDP

2. Projection about baseline GDP growth in the crisis year.

3. Information about actual GDP growth in the crisis year.

Let us take the case of Nepal.  

In the year 2018/19, GDP in nominal terms in Nepal was Rs. 3458793 million.

In the year 2019/20, the economy was expected to follow the trend growth of the past three years i.e. economic growth rate was projected to be 7 percent. With the deflator growth of 6.5 percent (a measure of inflation), the growth rate of nominal GDP would be :  ((1*1.07*1.065)-1)*100=13.955 

With  this, GDP in  2019/20 would be 3458793*1.13955=Rs. 3941467 million. This is the size that Nepali economy would achieve has there no COVID-19.  So it is called baseline GDP. 

Now, lets us come to the case of COVID-19. If we assume that the growth rate is zero percent, then the growth rate of nominal GDP can be calculated as : 1*1.0*1.065=6.5 percent(1*(1+growth_rate/100)*(1+deflator_inflation/100). As such the actual GDP size in 2019/20 is : 3458793*1.065=3683614 million.

Now, GDP Loss=Baseline GDP-Actual GDP=Rs. 3941467-Rs. 3683614=Rs. 257.826 million or Rs. 257 billion. 

Loss in GDP in percent =257826/3941467 =6.54 percent 

Again suppose that the economy contracted by 2 percent  in 2019/20 instead of growing by zero percent. The size of GDP in 2019/20 would be Rs. 3458973*0.98*1.06489=Rs. 3609568 million.

GDP Loss =3941467-3609568=331491 million or 331 billion.

Loss in GDP in percent =331491/3941467 =8.41 percent .

If we assume that the economic growth rate would be 6 percent had there no corona crisis, GDP loss would be  Rs. 221 billion in case zero growth and Rs. 295 billion in case of contraction by 2 percent.  

This simple calculation shows that the economy lost between Rs. 221 billion to 331 billion income in 2019/20 which is about 5.7 percent to 8.4 percent of GDP.