How Coronavirus Price Gouging Is Adding To GDP

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Just a little note from the details of economic statistics. The coronavirus – more accurately, the behaviour associated with it – is adding to Gross Domestic Product. This is usually interpreted as us all getting richer.

This might not be entirely the case, as so often with interpretations of GDP.

B

ritain has stockpiled £1bn worth of food in just three weeks, it was revealed on Saturday, as a health chief told shoppers hoarding supplies during the coronavirus outbreak they “should be ashamed” that NHS workers are being left without after long shifts.

Medics are facing empty supermarket shelves despite manufacturers increasing production by 50 per cent, the daily Downing Street press conference was told.

GDP is calculated as being the value added at market prices. We also try, as hard as we can, to measure final sales, not ones along the production chain (thus the adjustments for “inventory” in the system).

OK, So, the populace has gone mad and stripped the shelves of months worth of food – and, to everyone’s joy, loo roll – meaning that there are more of those final sales. Inventories have fallen. Production is wildly up.

GDP has risen. We are richer.

Of course, over in other areas of the economy GDP has fallen too and the net number is likely to be negative. But it is still true that those Grannies pushing trolleys of 480 rolls of bum wiper are increasing GDP. Good on them, eh?

There will be a push back, obviously enough. For what has happened is that those inventories are now in the larders and bathroom cupboards of the nation, not the wholesalers’ warehouses. Given that we don’t count the movement from cupboard to flatus in our economic statistics – it not taking place at market prices – what we would have counted as GDP in normal circumstances, the sale, is now not taking place, for it already has. So, there will be an equal drop in GDP as the hoardes (that looks wrong but hordes has a different even if mildly apposite meaning) are depleted.

Presumably at about the time that all other economic activity is rising again and so the net will be positive. But there will be that drag on GDP. And there will be someone out there (if we called up ONS we could probably find out who as well) calculating the effect of bog roll hoarding. Which will be positive – we’re richer! – in the current measurement time span and negative in one in the future.

Which does bring us to an interesting little foible. Imagine if we allowed price gouging. Bog roll soars in price as peeps want vast quantities of it. GDP is measured at market prices. We’d be hugely richer right now. But those sales that don’t happen in the future would be at those lower prices associated with normality. The GDP loss from the future sales not happening would be less from the GDP addition now from the more expensive sales happening now*. Thus allowing price gouging would increase GDP over time and we’d all be richer.

But this is, of course, just a foible of GDP right, you can’t actually be insisting that we’d get richer by allowing people to charge us more for loo roll, can you Timmy?

Well, actually, I can. Being richer is having more of what you want when you want it. That ability to consume is the only valid definition of wealth. Peeps – for whatever reason, and it is, always, the individual who gets to decide their utility function – want bog roll now, in vast quantities. Yes, it’s a delusion, the madness of crowds. But, people are gaining vast amounts of bog roll right now. They’re richer, their desires are being fulfilled.

*Sadly, it doesn’t actually work this way and why is left as an exercise for the reader.

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Michael van der RietSurreptitious EvilSpike Recent comment authors
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Spike
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Spike

Well, of course not; how do the hoarders pay those gouger’s prices without cutting back elsewhere? Maybe by converting their savings into consumption, but usually they save rather than spend in times of systemic stress. Unless an election-crazed Congress votes to mail $1000/$1200/$2000 to EVERYONE.

Surreptitious Evil
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Surreptitious Evil

“Hoardes” looks wrong because it should be “hoards”.

Michael van der Riet
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Michael van der Riet

Do panic buyers buy the same stuff as they usually do? Probably not. Fresh produce being an obvious example. New cars, new carpets, new dishwasher, all durable goods in fact, put it off till post-lockdown. The future is not always an extrapolation of the past.