September 10, 2004

Gross!

Posted by John Quiggin

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:
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).
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 GDP2. 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.

1 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.

2 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.

Posted on September 10, 2004 10:09 PM UTC
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