Truck and Barter

Don Boudreaux insists that the style and attractiveness of modern airports are not included in GDP. This is a debatable point. 30 years ago airports were no-frills affairs, but now have shopping malls, restaurants, cleaner facilities, etc. inside.

Let me answer with another question: Climate controlled luxury shopping malls (some provide free wi-fi) have increased the comfort, pleasure, and style of shopping. Is the increase in their attractiveness accounted for by GDP?

Answer: None of thse "public space" issues are well-reflected in real GDP, although the cost of building them shows up properly in nominal GDP.

You might point out that taxpayers and consumers pay for these amenities, and this should be reflected in GDP. Then I'd reply that just because something is paid for (in nominal GDP) doesn't mean it's properly accounted for in real terms.

If prices increase because airports are masterpieces of design, then the "real" price paid for using an airport might very well be less, because you're now using the building as an airport and as a work of art. The marginally higher price is paying for an additional service: art.

In other words, Grand Central Station is more than a train station; at least, it is to me. Real GDP doesn't reflect this. I doubt that nicer spaces like Grand Central are accounted for in real GDP, as "niceness", like "good art", is not measurable. But I don't think real GDP can or should reflect my view of art. That's not what real GDP is for.

(Btw, Penn Station isn't more than a train station).

In Don's airport case, we have commerce coming to the rescue of dismal airports. Inasmuch as this commerce is done inside of domestic airports, final sales of goods sold there are included in nominal GDP, and the wages of the employees working there are in nominal GDI.

Airport stores and restaurants are not treated any differently than non-airport stores. It doesn't matter to the BEA whether Don purchases a Brooks Brothers suit inside of Reagan airport or inside of a local shopping mall. (I don't know how international airports' "duty-free" shops are handled, though I think no differently). If the BLS adjusts for quality change in the goods sold at these stores nationwide, then that quality change is reflected in real GDP.

Hence, the real question is whether the prices (and taxes) paid for airline tickets and goods in the airport somehow account, in real terms, for the nicer amenities at airports.

Prices serve to co-ordinate activities; they do not serve the purpose of measuring quality-adjusted value to the end consumer. They can be used for the latter only under a narrow set of circumstances. Simply put, the market isn't providing prices to the data agencies that adjust for quality change of public spaces. That's not the job of prices, nor of markets; it's the job of the agencies. And right now they don't do it (it's NOT easy)... I know of no way to verify this conjecture for you other than asking BLS and BEA statisticians if they are manually adjusting for nicer shopping spaces...

In fact, government services, like airports, are valued at COST, and there are horrendous difficulties in measuring the productivity of government enterprises. That airports have become joined with shopping malls makes things interesting.

Back to my question above, if you think nicer shopping malls are not reflected in real GDP, and modern airports have just integrated shopping malls, you might think that nicer airports have not been included in real GDP. If nicer airports have come about through government spending, then nicer amenities haven't been accounted for, since only the small imputed productivity increases in airport building would have marked down the cost of prettying them up.

(Note that V. Postrel recently noted the difficulty of filtering hotel room quality change from price change; Don's question is, in fact harder, since airport amenities are not directly charged for.)

Sex and GDP

In my view, the use of aggregate economic data had already gotten out of hand by the 1950's. We have to get back to basics, and understand what the data are actually trying to measure.

What does GDP purport to measure? NOT WELFARE and NOT LIVING STANDARDS. Get over it, folks! As much as some would like it to be, GDP is not a people-experience counter. GDP is ONE account of the value of goods and services produced and exchanged via markets and governments. It does not put a value on most intrafamily exchange and production, although farmers growing food for themselves do have the value imputed. The standard example of non-counting is housekeeping; if it ain't paid for, it ain't counted. If it is paid for, it is. Quality change is not really much of an issue for housekeeping.

But to see in greater detail how arbitrarily some things are counted and others aren't, how about a more controversial example: sex. If it ain't paid for, it ain't counted. In fact, because it is an illegal activity, even paid sex is not included in the U.S. GDP. (Moving to the System of Natonal Accounts will change this, and I'd like to see how the BLS will get its prices!) When counted, I have no personal or academic knowledge of whether quality change will be a "problem" with prostitution.

Don't think paid sex is an important service? Some say sex, drugs, and smuggling would increase Swedish GDP by only 0.2%. Others have noted a much larger figure for elsewhere, "According to Marilyn Waring, the sex industry accounted for about 14 per cent of the GDP of Indonesia, Malaysia, the Philippines, and Thailand in 1998". This puts economic growth in a new perspective, no? Prostitution could also be about 2% of GDP for those countries, it depends who you ask. Poland and the UK both estimate about 0.2% of GDP is prostitution. I get the feeling that 0.2% is just an assumed nuisance value, like "50% unemployment in Iraq".

I ain't no Expert

Please note that Don is on my dissertation committee, so he knows that I cannot pass up a chance to discuss error in macroeconomic data.

First of all, no economist can truly be an expert in GDP; the economy is too massive and complex for one person to understand how to make GDP. This is for the same reasons, but with far greater potency, that nobody knows how to make a pencil.

I'll grant that you can understand the outline of all the processes of national accounting. But no man can know what to do with all the prices, quantities, formulae, regressions, guesses, estimates, and the like for a 300 million person strong, complex flux of growth and decay. How do I know this? Because I tried! How they are all these elements put together? How wide in scope is each available data series? What means are used to measure the different goods and services? How do we adjust for the birth and death of firms? How do the scope and quality of estimates differ from last quarter, last year, last decade? What is missing from these estimates?

The matter of economic accounting is so complex that someone just proposed the idea of a "Certified Economic Accountant". Really:

Hence we advocate a Certified Economic Accountant (CEA) degree or diploma program to gain enhanced recognition and greater understanding for national economic accountants and their work.