Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in
the health care field.
Suppose some evening a group of bored and mischievous teenagers slash tires on a number of
cars in the parking lot of a shopping center. Distraught car owners call sundry nearby garages to
send someone to fix the damage on the spot or tow the cars in for repairs. That work is speedily
done, and the cars are ready for use again. The car owners pay the garage owners sizable repair
bills.
This fictitious event leads to a number of questions:
1. Did the garages deliver value to the car owners?
2. Was gross domestic product increased or decreased?
3. Were the car owners better off, after paying the repair bill?
Today’s Economist
Perspectives from expert contributors.
My answer to the first question is yes and to the second yes, as well, unless the garages had to
give up other jobs with revenue equal to or greater than what they earn coming to the car
owners’ rescue. To the third question, my answer is, it depends.
If we take as the baseline the position of the car owners after the tires had been slashed, they
would be better off, unless for some the repair bill turned out to be so high that, in retrospect,
these owners would have preferred to abandon their cars. If we take as the baseline the situation
before the tires were slashed, the entire affair left the car owners worse off. It reduced what
economists would call social welfare.
Why is this vignette in so serious a blog as Economix? Because it illuminates a phenomenon not
always fully appreciated when we talk about value added or G.D.P.
In many instances, Person (or Enterprise) A delivers great value to Person (or Enterprise) B to
extract the latter from a situation into which B should not have been put in the first place. We
count in G.D.P. the value added by the extrication but...Read more »»»
