Unit 2 Macro: Sex and Drugs included in Measured UK GDP

The Office for National Statistics has, for the first time, included estimates of the impact of prostitution and illegal drugs in the national accounts. By the ONS’ reckoning they add about £10bn to the British economy. The assumptions used in making the calculations have been the subject of some criticism. I have summarised below the assumptions behind the estimated spending / income and output effects of including prostitution:

Is GDP the least worst alternative?

1. Demand: The ONS assumes that the number of prostitutes has the same pattern through time as the 16+ male population - the ONS has no time series data for the number of prostitutes.
2. Rents: The ONS assumes that Prostitutes or their pimps pay the same average rent as is used in the imputed rental calculation, and the renter:occupier ratio among them is the same as in the data used in that calculation.
3. Intermediate consumption: It is assumed that Prostitutes spent the equivalent of €125 per year on clothes and €0.50 per client on condoms in 2007
4. Corporate activity: The assumption is that no activity of corporations or quasi-corporations in prostitution. This is simply based on the intuition that prostitution is illegal
5. Formal employment: There is no employment in prostitution; all prostitutes and pimps are self-employed
6. International trade: These are assumptions that there is no trade in either direction in prostitution - There are no imports of prostitution services. All prostitutes in the UK are UK residents; British residents do not consume prostitution services abroad.

The last assumption is best described as heroic! But consider the difficulties that the statisticians at the ONS have in finding any reasonably valid and accurate data on a high international trade in sex services both here in the UK and overseas.

Among the figures released by the ONS were the following:

• There were 60,879 prostitutes in the UK in 2009, who had an average of 25 clients per week – each paying on average £67.16 per visit.
• Illegal drugs add £4.4 billion. Crack cocaine accounts for £1.5 billion of this, powered cocaine £1.04 billion, cannabis £828 million and heroin £536 million.

More here from Sky News: http://news.sky.com/story/1271385/drugs-and-prosti..

Is GDP the least worst alternative?

And here is a short video from Linda Yueh on GDP as a measure of economic performance