Sex, Drugs and GDP

choi

National accounts  | Sex, Drugs and GDP; Italy’s inclusion of illicit activities in its figures excites much interest. Economist, May 31, 2014

Quote:

“THE announcement on May 22nd by Istat, Italy’s statistical body, that from October it would include drug trafficking, prostitution, and alcohol-and-tobacco smuggling in its economic-output numbers has generated a stream of sniggering headlines. To some, it smacks of 1987, when Italy started taking account of its shadow economy, the off-the-books business which makes up about a fifth of Italian GDP [here meaning under-the-table transactions to evade tax, excluding drug and sex]. As a result, the economy grew by 18% overnight, surging past Britain to be the West’s fourth-largest economy. The event was hailed as il sorpasso (the overtaking) and the source of much national joy

“Reporting illegal economically productive activity in which all parties take part voluntarily is required under EU rules known as the European System of Accounts (ESA). But as the guidelines have not so far outlined how to measure drug deals and fake cigarettes, and as such things are by their nature difficult to gauge, few countries comply [fo the list, see, in the next posting, quotation (b) in (1)]. That will change from this autumn, when an update of the ESA will refresh guidelines on calculating revenues from the seedier side of the economy.

My comment:
(a) There is no need to read the rest of this article, which is confusing as to which did what when (to start and revise inclusion of its underground economy, from under-the-table transactions to drug and sex industries).
(b) The “national accounts” in the title is identical to National Income and Product Accounts (NIPA). The difference is in name only: NIPA is that of United States, whereas Europe and the rest of the world use “national accounts.”  As you may recall from my May 25, 2014 posting, NIPA quantifies components of GDP.
(c) European system of accounts (ESA; more formal term is: European system of national and regional accounts) has several versions: 1979, 1995, 2010
(d) Italian English dictionary:

sorpasso
(noun masculine): “overtaking (in a car)”
(v): “first-person singular present indicative of sorpassare [to overtake, surpass, outdo”
en.wiktionary.org/wiki/sorpasso

choi

Illegal Sex and Drugs Trade to Be Included in Calculating British GDP. Euronews, May 30, 2014
www.euronews.com/2014/05/30/ille ... lating-british-gdp/

Quote:

“Prostitution is legal in Britain, but brothels, pimps and advertising sex are not

“Although people engaged in such illegal work are unlikely to pay taxes on it governments do benefit from the money they spend on taxable purchases [with proceeds derived from illegal work].

Note: Euronews
en.wikipedia.org/wiki/Euronews

choi

UK’s official publication in chronological order.

(1) Joshua Abramsky and Steve Drew, Changes to National Accounts:Inclusion of Illegal Drugs and Prostitution in the UK National Accounts, Office for National Statistics (ONS), United Kingdom, May 29, 2014
www.ons.gov.uk/ons/guide-method/ ... tional-accounts.pdf

Quote:

(a) "Executive Summary

"This article covers the inclusion of illegal drugs and prostitution activity in GDP and its components; this will be introduced when revised figures for the UK National Accounts, consistent with Blue Book 2014, are published in September 2014.

"This change is a result of ensuring comparability in measuring Gross National Income (GNI) across EU countries.

"The article explains the methods and data used to estimate the level of illegal drugs and prostitution activity in the UK * * * It does not include numerical impacts – please find these in the article ‘Impact of ESA95 changes on current price GDP.' [see the second quotation in (2) immediately]

"The article concludes that there are significant limitations in the availability of data to calculate these estimates, and that this means that such calculation requires a number of assumptions on which the estimates are, therefore, partly based. This applies especially to the estimates of prostitution activity.

(b) "However, the treatment of such transactions in the National Accounts of the EU and EEA Member States varies between individual Member States. Some Member States include them,[footnote 2: ‘As at 2012, Estonia, Austria, Slovenia, Finland, Sweden and Norway’ but not Italy] others do not. Among the former, different types of illegal activity are included. This impairs the international comparability of the National Accounts.  ONS will therefore be including illegal drugs and prostitution activity within the estimates of UK GDP and its components, starting with the publication of Blue Book 2014 in September 2014.[footnote 3]

(c) "Currently, the only type of illegal activity covered by the UK National Accounts is the smuggling of alcohol and tobacco (included within the estimates of imports of goods and household final consumption expenditure (HHFCE)). Therefore, ONS is required to estimate and include the levels of the activities of the manufacture, sale and consumption of illegal
drugs, and the sale and consumption of prostitution. This is the first time that any such estimates will have entered the UK National Accounts.[footnote 4]”  at page 2

Note:
(a) GNI is the same as GDP in VALUE, but differs in APPROACH (to arrive at GDP). In other words, GNI comes from the income (or right-handed) side, and GDP from product (or left-handed) side, of the NIPA.  (GDP is out of favor with economists.)
(b) For EEA, see European Economic Area
en.wikipedia.org/wiki/European_Economic_Area
("comprises three of four member states of the European Free Trade Association (EFTA) (Iceland, Liechtenstein and Norway), and 27 [except Croatia] of 28 member states of the European Union (EU), with Croatia provisionally applying the agreement pending its ratification by all EEA countries. * * * One EFTA member, Switzerland, has not joined the EEA")
(c) blue book
en.wikipedia.org/wiki/Blue_book
(The term dates back to the 15th century, when large blue velvet-covered books were used for record-keeping by the Parliament of the United Kingdom; section 5.2 United Kingdom)


(2) National Accounts Articles - Impact of ESA95 Changes on Current Price GDP Estimates. ONS, May 29, 2014
www.ons.gov.uk/ons/dcp171766_365274.pdf

Quote:

"The latest estimate of the total impact of all [note the word ALL, beyond drug and sex] the improvements planned for September 2014 shows an increase in the level of GDP in current prices in 2009 of between 4% and 5%." at page 1

"3. Illegal activities (drugs and prostitution) * * * The inclusion of illegal drugs and prostitution is likely to increase the level of GDP in 2009 by around £10 billion [thereby GDP to be revised upwards by 0.7%: table 2], around £5.3 billion [0.4% of GDP] attributable to prostitution and £4.4 billion [0.3%; excluding smuggling of drugs which had been incorporated in 2009 GDP already, see quotation (c) in (1) above] attributable to illegal drugs. In all years between 1997 and 2009 the impact ranges from £7 billion to £11 billion"  at page 4

My comment:
(a) There is no need to read the rest of (2).

choi

Leonid Bershidsky, Sex, Drugs and Accounting in Europe. BloombergView, May 30, 2014.
www.bloombergview.com/articles/2 ... ccounting-in-europe

My comment:
(a) “The UK, which also already includes part of its gray economy, and would only add $16.7 billion, or slightly more than 0.7 percent, to its 2009 GDP under the new rules.”

“and would only add $16.7 billion”
(i) The “and” is superfluous
(ii) This “$16.7 billion” is “£10 billion” --see the second quotation of (2) in the preceding posting--converted to dollars by exchange rate.

(b) "Prostitution estimates are more precise in the Netherlands * * * It can be calculated, for example, that a 'window prostitute' in Amsterdam's famous red-light district has, on average, three clients a day. * * * The 2005 Statistics Netherlands report states optimistically: 'As escorts and call girls [as opposed to window prostitutes] have to travel, we assume they have only one client per evening.' * * * The UK National Statistics Office, whose methodology is based in part on Dutch studies, assumes that Britain's approximately 58,000 prostitutes (a number based on a 10-year-old study by a charity organization) have a rather higher turnover [of clients than Dutch counterparts]. They serve an average of 25 clients a week."