The Cheney–eBay controversy is a welcome break from all the terrible things happening just at the moment (like most moments, I guess) and gives me a chance to reprise my favorite economic aphorism.
Gross Domestic Product is a lousy measure of how well a country is doing, because it’s Gross, Domestic and a Product.
As I explained a while back:
Applying this to eBay, we can see that the value of second-hand goods sold on eBay shouldn’t count in GDP, whether they’ve depreciated (the usual case) or appreciated (antiques and so on). On the other hand, the retail services supplied by eBay should count and do. If, as Cheney asserts, people are running businesses selling stuff on eBay, then they are (self)employed and their earnings are part of GDP[2]. The time spent by household members shopping (including returning goods they don’t want) is not part of GDP. Garage sales and their on-line equivalents are more like returning unwanted goods than like retail business.It’s Gross because depreciation is not subtracted. If we are concerned with measuring economic welfare, even from a narrowly materialist viewpoint, the net measure is relevant and the gross measure is not.
It’s Domestic because it measures the amount produced in the country, including that which accrues to foreign owners of capital and is paid out as interest or dividends. National Product which is the output accruing to a country’s land, capital and labour is more relevant.
Finally, it’s Product, that is, a measure of marketed output that takes no account of inputs. If we increase our product by working harder or longer hours (in the market), or by consuming more natural resources, we are not necessarily better off. What matters in the end is productivity, not product.
Why then do economists pay so much attention to GDP? The answer is that it’s useful primarily as a measure of economic activity, for short-run macroeconomic management. If GDP is declining, this is a good indication that the economy is in recession and that macro policy needs to be more stimulative. Taking account of things like depreciation, international income transfers, household work and work intensity would reduce the precision of estimates of short-run growth because all things are hard to measure, and would make GDP less useful for its primary purpose. (Of course, this is a Keynesian view – national account statistics like GDP are essentially a product of the Keynesian revolution).
fn1. All of this rests (as Kieran implies) on the assumption that there’s a sharp division between household and market sectors. National Income is the value of what households sell to the market. As the division between household and market blurs, national income statistics become less useful.
fn2. To make sense of Cheney’s claim, you have to assume that eBay sellers are illegally concealing their activities, which is quite likely. But a big part of the standard free-market case for tax cuts, and a source of supposed behavioral responses, is the idea that tax cuts will shift people out of the informal/illegal sector into the legal, taxable economy. Cheney appears to be saying that the informal sector is growing under this Administration.
{ 7 comments }
Giles 09.10.04 at 10:57 pm
I’m never too sure what gets sold on ebay, but I imagine lot of it is the sort of stuff that would otherwise be stored in garages until it fell to pieces. By selling a computer, microwave or other appliance on ebay, surely the sellers are reducing the depreciation of domestic capital stocks in the economy (and recourses depletion as well) – or increasing domestic investment, depending how you look at it. Thus while they may not add much to GDP, they may be adding to NNP.
amazed at brazen lies 09.10.04 at 11:03 pm
This must mark the first time ever that the grey market economy is being cited by a politician as proof positive that their policies are working.
Next thing you know, Cheney will cite how the profits for the Mafia have increased under Bush’s policies.
ag 09.10.04 at 11:30 pm
I think Cheney’s original pt was less about GDP, and more about unemployment — ie the 400,000 power sellers on eBay should be considered self-employed.
I suppose I should now feel better off than I did four years ago.
John Quiggin 09.11.04 at 12:22 am
Giles, you’re right. On the same point, as quite a few people have noted, the increasing importance of computers has increased depreciation rates for the economy. So while eBay is going the other way, the gap between GDP and NDP is rising. And, of course, as net foreign debt grows, so does the gap between DP and NP measures.
Phill 09.11.04 at 3:14 am
If anyone wants to make a quick buck just find yourself an IBM Executive Model D electric typewriter, change one of the strikebars so it has th superscript and put it up for sale on EBay.
For extra profits add some stickers that read DoD Property or 111th Fighter, Texas Air National Guard or the like.
Then casually mention the machine in a slashdot post.
daveb 09.11.04 at 5:07 am
What will happen to E-bay & its sales if the administration’s VAT is passed by Congress and applied to all those transactions (or will internet purchases be exempted ?). What happens to all those ‘independent’ vendors; bankruptcy & the dole?
John 09.11.04 at 5:30 am
“For extra profits add some stickers that read DoD Property or 111th Fighter, Texas Air National Guard or the like.”
That’s evil. I like it.
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