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Including the Blackmarket in GDP

While driving to campus the other day, I heard an interesting NPR story that talked about European countries including sex and drug markets in their GDP measures. Apparently this isn’t a new development, since I found a NY Times article on the topic from July 2014.

The article points out that the decision is politically driven — including these markets in GDP will certainly increase measurements, making governments look healthier and politicians more adept. The article further points out that “European Union governments [are] obliged to reduce debt as a percentage of their economies….making growth rates from Spain to Sweden look better…making debt ratios seem rosier.”  Further bolstering GDP will be new inclusions of research and development.
While these numbers will certainly help European countries look more productive, it is not clear to what extent. Measuring underground markets is inherently difficult, and the means to measure these underground economies is not well-defined. Countries will likely face incentives to overestimate the level of production their respective blackmarket institutions incur.
The move has been contested on moral grounds as well. Opponents claim that GDP is a measurement of living standards, and that since prostitution doesn’t improve a country’s quality of life, it should not be included. Additionally, prostitution is a result of sexual slavery and including it in GDP would effectively condone the behavior.
The article closes by pointing out that countries can inflate GDP as much as they want, but will still have to pay their debt — no matter how good the debt ratio appears.
To me, it seems that politicians in countries with high-levels of blackmarket activity will be the only ones who benefit from changing the definition of GDP.  It also makes it more difficult to use GDP as a quick cross-country measurement tool, since not all countries include the same segments of the economy.  What do you think? Is there an aspect to this scenario that I’m missing?


  1. wintera15 wintera15

    I am also pretty intrigued by this idea. While the US has a black market presence, I think its percentage of overall GDP pales in comparison to the percentage of GDP that the black market makes up in Europe. One of the classes I took while abroad spent a of couple weeks discussing the black market in Europe. I thought it was particularly interesting in countries where the unemployment rates were extremely high, such as Spain or Italy. Their unemployment rates are high but the unemployment rates for individuals between 18 and 30 years old in these countries are even higher. Part of this was cultural but a large part was also an indicator of how extensive the black market presence is. Furthermore, as the European Union continues to integrate itself across nations and migration grows, the black markets that each country specializes in will continue to spread. I don’t know how you are supposed to accurately measure these transactions, but I think it makes a lot of sense to recognize the role they play in GDP.

  2. The European economies are in recession, with Spain particularly hard-hit (Greece is small…). So one component is picking up odd jobs of every and any sort. While in principle such normally should include the payment of VAT [value added tax], if someone trimmed your roses, well, it’s a royal pain to file the paperwork for a small amount. Now proper businesses have an incentive to limit off-the-books purchases because they can deduct them and lower their VAT. But for small contractors — the plumber — a homeowner is happy to pay in cash, no VAT and no ability to deduct it as an intermediate cost. The plumber has no incentive to report income, except a fear of being caught. That’s the big black market. However, it’s also likely to be comparatively constant across time — see below — so unfortunately the rise in unemployment (25% in Spain, much higher in your age bracket) is all too real.

    Now what does GDP seek to measure? If it’s total economic activity, which is the standard purpose, then we’d like to include everything. But we’d also like an accurate measure of growth, so consistency is important, too. If black market activity is hard to measure, then maybe we shouldn’t try. Doing so might give a misleading picture of growth, increase the variance of the data (less information on how the economy is doing), and cost statistical agencies money that could be better spent on beefing up data collection elsewhere.

    Finally, why should a country ever seek to be debt-free? Isn’t it rational to borrow long term to cover the expenses of long-term investment, be it a bridge or funding education? That hinges on appropriately measuring the cost of debt. Right now the quick “cut” is that nominal interest rates are zero, so if borrowing brings any benefits, do so! Again, though, what are sensible metrics? — plural because like most issues, one dimension won’t capture everything.

  3. HeeJu HeeJu

    While European countries will definitely be affected by including black market into GDP account, I believe developing countries in Southeast Asia will also see significance difference with this inclusion. In these countries, illicit small arms trade, drug trade, and prostitution are very prevalent. I wonder how much these nations’ GDP will change if we calculated it with transactions in their black markets.

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