Italy's and the UK will add marijuana and prostitution to improve GDP accuracy...but will it?

Should GDP Include Illegal Drug Deals?

by Elaine Schwartz    •    Jun 1, 2014    •    1325 Views

In 1987, Italy decided to include its “off-the-books” economy in its GDP. The result was an 18% boost. Now, further complying with EU accounting regulations, Italy will add illegal drugs, prostitution and black market alcohol and prostitution. Announcing a similar policy, the UK said that by adding illegal drugs and prostitution, its 2009 GDP went up by .7% or $16.7 billion extra dollars (£10 billion).

The EU rationale for including illegal activities in the GDP is “comparability.” After all, if the Netherlands has been including drug and prostitution revenue and Germany, Greece, Austria and Hungary have had prostitution in their GDP totals, shouldn’t everyone? So now the EU says that its member nations all need similar national accounting.

As you can imagine though, the problem is GDP accuracy. According to Bloomberg, to calculate drug revenue, Statistics Netherlands collects heavy users numbers from non-governmental organizations, sources recreational users from sociological data, and then does at least some of its pricing from the internet. Similarly, for prostitution, estimates even have to involve hypothetical “client turnover.”

Still, the GDP boost will be quite handy for nations like Italy that are perilously close to their borrowing limits. With national deficit limits a percent of GDP, once GDP rises, so too does the amount they can borrow.

Our bottom line: This quote from The Economist sums it up:

“Enrico Giovannini, a professor of economic statistics at the University of Rome and a former Istat president, quips that non-statisticians often suggest that measuring happiness and well-being is a tricky task. His response: ‘Have you ever tried to measure GDP?'”

We should add that since GDP accounting began in the United States during the 1930s, illegal activities have been excluded. However, with prostitution legal in Nevada and recreational marijuana sales legitimate in Colorado and Washington, the BEA could pick up the numbers in GDP statistical surveys. I do wonder though about accuracy. With banks avoiding the marijuana economy, the industry is primarily a cash business.

Do you believe GDP, as a record of the goods and services a country produces, should include illegal activities? Please share your thoughts in a comment.

Sources and more...The best articles that I read about how nations were complying with EU national accounting rules were in BloombergCNN Money and The Economist (paywall). The bigger issue,though, is GDP accuracy which we have looked at here and here. Note: This post was slightly edited after it was published.    

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