23 May 2014

Hookers to be part of Italy's GDP

Italy's National Institute of Statistics recently announced that next year it will start including activities such as prostitution and illegal drug sales in the country's Gross Domestic Product.

And why not. After all, these activities create jobs and incomes and are therefore an integral part of a national economy. Estimating them will present a challenge, of course, as they are not usually reported, however that is no excuse for pretending they don't exist. Italy already includes an estimate for "grey market" activity—legitimate businesses that evade taxes.

It also illustrates once again how the GDP distorts the economic picture. The GDP includes much that is bad in society: higher crime rates lead to more expenditures on police, international tensions lead to more expenditures on arms, more disease leads to more medical spending, etc. In a recent submission to the National Energy Board, pipeline company Kinder Morgan claimed that marine oil spills, “can have both positive and negative effects on local and regional economies ... Spill response and clean-up creates business and employment opportunities for affected communities, regions, and clean-up service providers.” Kinder Morgan nicely illustrated the perversity of the GDP. From its perspective, oil spills are good for us.

The problem is that the GDP is being used for purposes well beyond what its inventors intended. Simon Kuznets, the economist largely responsible for developing the GDP in the 1930s, stated "The welfare of a nation can scarcely be inferred from a measure of national income." Unfortunately, that's what the GDP has become—the primary measure of nations' welfare. It's long past time it was replaced by an economic yardstick that measures the quality of a nation's economy rather than its quantity.

In the meantime, I'd rather see hookers show up on our GDP than oil spills.

1 comment:

  1. Wow. How do you assess hookers in the context of Real GDP(corrected for inflation), equilibrium price, opportunity costs, inflation/deflation, human capital, division of labour, supply curve and non durable resources not to mention depreciating assets?