Monday, June 9, 2014

Should GDP include hookers and blow?

New methods of measuring economies sometimes raise eyebrows. Even more so when they involve prostitutes and mounds of cocaine.

The U.K., Ireland and Italy are among the nations now moving to include illicit doings when tallying their gross domestic product, the broadest measure of goods and services across an economy.

The U.K. could add as much as $9 billion to the value of its GDP by including prostitution and about $7.4 billion by adding illegal drugs, by one estimate, enough to boost the size of its economy by 0.7%. Not to be outdone, Italy will include smuggling as well as drugs and prostitution. Both changes will begin later this year. ...

Some economists question the merits—and methods—of measuring the shadows. Criminals go to great lengths to hide transactions usually conducted in hard-to-trace cash. Because the activity is beyond the easy reach of tax authorities, it isn't something that can bring in revenue to help a nation pay off its debts. All of which complicates measurement. ...

The argument in favor is simple enough. If drug sales aren't counted in a place where people spend half their income on drugs, one could conclude, wrongly, that the population saved half its money. ...

Some European countries have extra incentives to inflate the size of their economies. In addition to bragging rights, a higher GDP helps keep a nation's debt and deficits within the EU's prescribed targets.

If a nation's deficit must remain below 3% of GDP, a profligate government would want the largest possible estimate of GDP. For others, a higher GDP may end up costing governments more. The 28-nation bloc uses measures of GDP to determine how much each country contributes to the EU's collective budget.