Monday, December 27, 2010

How Not to Increase GDP

There’s a scene in an excellent but little known movie called Blue In the Face, where a hustler played by Michael J. Fox (!!!) asks another character “How much would I have to pay you to get you to eat a bowl of dog shit right now?” Which leads me to:

Seth Roberts’ joke post about China:

Person A to Person B: “See that piece of shit? If you eat it I’ll give you 100 million yuan.”

Person B eats the shit.

But Person A doesn’t want to give him 100 million yuan.  He says to Person B: “How about I eat shit too? Then we’ll be even.”

Person B agrees.

Person A eats some shit. “Now we’re even,” he says.

They have just increased GDP by 200 million yuan.‡

I'm a big fan of GDP - it's the best game in town - but this is a good illustration of what can go wrong with GDP.

The practical concern is how much of reported GDP in a place like China is actually transactions like this. Certainly the Chinese are building things like high-rises that no one wants only to tear them down again shortly thereafter.

† The backstory with Blue In the Face is that the cast of Smoke had such a good time filming it that they decided to do another movie right then and there. I recommend both.

‡ For those inclined to think that GDP hasn't changed here, in principle, in-kind transfers like this do count as part of GDP. What’s key here is that the market value of eating the shit has been established. But, in-kind transfers are not measured well. So theoretically, this would be part of GDP, but for practical purposes it would probably be missed.

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