## Monday, May 28, 2012

### Link to a study on Household Production and how much it would add to GDP if it was counted.

When we cover the basics of Gross Domestic Product (GDP) in Economics we learn that "Household Production" is not included in the official measure of GDP. Household production is classified as work (labor performed) you do yourself that does have a market value but since you perform it yourself the value is not counted in GDP.

Examples:  I can clean my own house (value of labor not counted) or I can hire someone to do it for me (value of labor counted). I change my own oil in my car (value of labor not counted) or I can hire someone to do it for me (value of labor counted).  I can tutor my own child in Math (value of labor not counted) or I can hire someone to do it for me (value of labor counted). I can fix a leaky faucet or hire a plumber to fix it.  So on and so forth.

Here is a recent study from the Bureau of Economic Analysis (BEA) that attempts to determine how much GDP would be if household production was included in the official measure.  Below I copied and pasted only the basic conclusions from the paper.

Summary of Findings

This paper develops a satellite account that adjusts gross domestic product (GDP) for household production between 1965 and 2010. The primary findings are as follows:
• Incorporating the value of non-market household production raises the level of nominal GDP 39 percent in 1965 and 26 percent in 2010. The decline reflects the steadily decreasing number of hours households spent on home production.
• In 1965, men and women spent an average of 27 hours in home production, and by 2010, they spent 22 hours. This overall decline reflects a drop in women’s home production from 40 hours to 26 hours, which more than offset an increase in men’s hours from 14 hours to 17 hours.
• The downward trend in the hours spent on non-market household production appears to be unaffected by the 2007–2009 recession, despite the increasing number of unemployed household members.
• Including the value of household production lowers measured GDP growth by accounting for the losses in home production associated with increases in women’s labor force participation and in market wages between 1965 and 2010. Over this period, adjusting nominal GDP for home production lowers growth from 6.9 percent to 6.7 percent.
• Home production reduces measured income inequality. Although households engage in a similar number of hours in home production regardless of income, adding a relatively constant value of home production to all households proportionately raises the income of low-income households more than that of high-income households.
Applications of this can be significant. One in particular comes to mind.  In poor, developing countries people, in general, do a lot more things for themselves. Most notably in the production of food and securing the everyday necessities of life. LOTS of production they do themselves that is not compensated for monetarily.

Thus, on national level the official GDP statistic would UNDERESTIMATE the value of production in that country.  This can lead to a misunderstanding/misrepresentation of the actual standard of living in the developing nation.

I lived HERE for two years. I have seen the disconnect up close and personal.

Note: Additional analysis of this study can be found at The Economix. I just noticed this morning they did a post on this study as well.

#### 1 comment:

1. Good post. I was looking for good articles to discuss GDP with my students as a warm up.I was discussing used vs new video games and "pirated" movies as a discussion point earlier this week. Thanks.
On a side note, I bet living in Mali was quite an experience.

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