The iPhone5 may be boosting GDP by even more than JP Morgan predict

Paul Ormerod
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APPLE’S iPhone5 has already smashed sales records. More than 2m online orders were placed on the first day that consumers could make purchases over the web. So it’s little wonder that JP Morgan has estimated that iPhone5 sales could add as much as 0.5 per cent to American GDP.

These numbers have attracted criticism. After all, if consumers simply buy iPhones instead of other products, how could output could be boosted by such an amount? But there is actually a powerful case to be made that, thanks to products like broadband and mobile phones, the growth rate of the American economy has actually been distinctly higher than the conventional estimates suggest. Since 1992, the US economy is reported to have grown in real terms at an annual average rate of 2.6 per cent. However, the actual figure could easily be 3.5 to 4.0 per cent.

This is because of the massive waves of technological innovation which have taken place. The quality of available products has grown dramatically. Smart phones, for example, have more computing power than many mainframes of the 1970s. But how do we measure this increase in quality?

This is a very difficult problem for the Bureau of Economic Affairs (BEA) in America and the Office for National Statistics (ONS) in the UK. The information they gather when they estimate GDP is based on information about the money value of what is being bought and sold. So they have to deduct the part of any change which is simply due to prices changing. This then gives what it is known as “real” GDP.

It is real GDP which makes the headlines, and it is real GDP that matters for measuring how better off people are. If the BEA or the ONS are trying to estimate real Marmite output, say, the problem is easy. Here is a product that has basically remained unchanged for generations. Any change in its price is straightforward to interpret. But what about a smart phone? Just a few years ago the product did not exist at all. Even a new release in a product may represent a big increase in quality compared to previous versions.

In markets where innovation is rapid, we are not comparing like with like. With a completely new product, top US econometrician Jerry Hausman at MIT has come up with the idea that a way of estimating the change in its price from the previous period is to assume that the price was then so colossally high that no-one bought it at all. As such, the implicit drop in price following the launch of the iPhone5 would be huge.

Inflation has been systematically over-estimated and real GDP under-estimated. Actual GDP growth rates could easily have been 1 per cent higher a year than the standard estimates suggest.

Paul Ormerod is an economist and partner at Volterra Partners, and author of Positive Linking: How Networks Can Revolutionise the World (Faber and Faber).