Economists Do It With Models

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Cartoonists Ask The Best Questions, GDP Edition…

February 19th, 2013 · 5 Comments
Econ 101 · Economic Growth · Macroeconomics

You may have noticed that I post a decent number of comics from Saturday Morning Breakfast Cereal. While I do know Zach, it wasn’t until recently that I started meddling in the cartoon-generating process. In general, it’s more amusing to see what non-economists come up with on their own, but sometimes I just can’t help myself. So here goes…

The original question:

Econ question: If I wrote a program wherein I and another person constantly traded $1 for nothing, back and forth, does GDP go to infinity?

(For the record, Scott Adams, the creator of Dilbert, actually has a degree in economics, yet I am far more impressed by the issues posed by thoughtful non-economist cartoonists.) Of course this sounds absurd, but there are plenty of things in macroeconomics that sound absurd, so I figured this was worth thinking about for a second. Or an hour. Here’s what I came up with:

So here’s some general information on GDP:
 http://economics.about.com/od/gross-dome…

I think the part that is most relevant to the question at hand is the notion of “produced.” So, used goods don’t count in GDP unless there is some value-added service associated with selling them, and even then it’s only the value-added part that counts in GDP. If I modified your scenario slightly so say that two people kept paying each other a dollar for a widget of some sort, that widget would only count in GDP the first time it was sold to an end user consumer. Your scenario is a bit more complicated I think, however (perhaps unintentionally). If the dollar going back and forth is exchanged just because, then it would be considered a repeated gift or transfer and not included in GDP because nothing was actually produced. If, on the other hand, the dollar is each time exchanged for some intangible service (a smile, wink, nod, etc.), then there is in fact a dollar of GDP generated with every transaction, since the service is new each time rather then the reselling of a used service. (I’m not even sure what a used service would be exactly, but it sounds kind of dirty.)

Your twitter commenter is right that digging a hole and then filling the hole back in would add to GDP with no net change in the state of the world, and one could make two arguments about this. One argument is that this is a shortcoming in the notion of GDP, similar to the broken window fallacy, which you can read about here:
 http://economics.about.com/od/output-inc…

Another argument is that, because people were willing to pay both to have the hole dug and filled in, that both activities must have had worth to people. Unfortunately, there is likely also a negative externality imposed on the guy who wanted the hole dug when the hole is filled back in and vice versa, which would counteract the value that is counted in GDP to some degree.

I read a thing a few days ago that I can’t seem to find but is very relevant to this situation. Suppose guy 1 pays $50 to punch guy 2 in the face. Suppose further that guy 2 pays guy 1 $50 to then punch him in the face. The article or whatever’s conclusion was that both guys had no more money than before but had black eyes, so they were worse off but $100 of GDP was created. It’s a cute example, but it isn’t quite correct because it ignores the warm fuzzies or whatever that the guys got from doing the punching, which they had to have gotten since they were willing to pay $50 to do it. When this is taken into account, each guy got a service that they valued at at least $50 plus a black eye. Because both men were willing to accept $50 to get punched, it must be the case that the cost of getting punched was less than $50 to both men. Therefore, both men were made better off on net by this set of transactions, but not by the full $100 of GDP that was created. The reason is that GDP doesn’t take into account wealth destruction, whether it be black eyes or loss of buildings due to earthquakes and the like.

In other words, GDP calculations can be a little absurd on the surface but aren’t totally absurd once you think a little. So apparently this is why Zach was asking his question:

He had actually shared the storyline with me earlier, and I made the following point:

I suppose that the motion of electrons counts as a different service each time, and the nerds are willingly giving the money each time, so as much as I want to say that this doesn’t count as GDP, I’m leaning towards allowing it. You could also just have the computer make a trivial beeping noise or something to count as the service rendered. The important part is that it has to be clear that nerd 2 is actually providing the service worth $1 to nerd 1 and vice versa, otherwise you’re just describing paypal with a zero commission, and it’s the paypal fees that count in GDP, not the money transferred itself. Perhaps describe the scenario as nerd 1 and nerd 2 each installing a program on the machine to accept the dollar in return for a beep?

After this exchange, I sent Zach a copy of Greg Mankiw’s favorite textbook, though I’m not sure how much it helped, since this is well outside of textbook and into thought exercise territory. In other words, it would make a great exam question if you want to give your students ulcers. :)

Tags: Econ 101 · Economic Growth · Macroeconomics

5 responses so far ↓

  • 1 uair01 // Feb 19, 2013 at 3:51 pm

    Quite expensive at 200+ dollars for a new book. Not something I’m willing to pay for just a good read. How is an amateur supposed to learn economics? Are the older editions still useful? They are much cheaper.

  • 2 James // Feb 19, 2013 at 3:54 pm

    This is quite funny Jodi because I was just teaching GDP last week to my intro to macro students. One person asked me what happens if I just give him a million dollars and then he gives it right back to me, in exchange for say a handshake. And we do this over and over again. Technically we are paying for a service (the handshake)… I told him we should do it but as soon as he gave me the Million Bucks I would keep the money and run. He said that isn’t fair. I said “You’ll learn Game Theory in your Micro class”… (most of this story is true… some is made up… mainly the last part about me burning him in front of class… wish I did)

  • 3 econgirl // Feb 19, 2013 at 4:25 pm

    @ uair01: Yeah, anything from the 3rd edition on is fine. Who would’ve thought that economic theory doesn’t change terribly quickly? :)

  • 4 econgirl // Feb 19, 2013 at 4:28 pm

    @ James: This poses an interesting issue, actually. Technically, GDP counts the “market value” of goods and services produced, so I’m not convinced that one million-dollar handshake transaction happening actually makes the market value of such an item a million bucks.

    Now my brain hurts again.

  • 5 James // Feb 19, 2013 at 6:16 pm

    That would suck to have to pay taxes on it though.

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