Defence spending: getting a sense of the numbers

 1. If we have to spend more on defence, what is the scale of those numbers?

2. The ever brilliant IFS have a "what does the government spend money on" guide. 

3. The picture is this: 

4. and the (round) numbers are this. 

5. Total spending 22-23 is £1,200bn.  We have (again in round numbers)

   a. NHS spending: 200bn = 20% of total

b. Education: 100bn = 10%

c. Defence 50bn = 5% 

d. Public order = 40bn, 4%

e. Transport 40bn = 4%

f. net debt interest 100bn, = 10%.

6. Total GDP in 22-23 was 2.6tr. So 1% of GDP is 26bn, 0.1% of GDP is 2.6bn (a basis point of GDP is 260m).  If we currently spend 2.3% of GDP on defence and want to increase that to 2.5% of GDP, that is a rise of 0.2 pp of GDP whiich is about 5bn.  That's about 12% of transport or public order, or 5% of Education. 

The Creative Industries

 I often struggle to remember who is in and out of the official definition of the creative industries. Here is the table:

And the source of all this is here: taken from the DCMS Sectors Economic Estimates Methodology

 

Does the EU or the US have an investment problem?

 The recent Draghi report says it's an EU problem : here's their Figure 5

but notice it says "productive investment".  What is this? A footnote takes us to Hanzl-Weiss, D., & Stehrer, R., ‘Dynamics of productive investmentand gaps between the United States and EU countries’, European Investment Bank Economics Working Paper, 2024/01, 2024. 

Figure 3.1 of this shows the oppostite of the above, 

namely the US always behind.  So what's going on?  If you exclude dwellings and other buildings and structures, you get closer to the picture above

here's just excluding dwellings

and here's excluding dwellings and other structures

Hence the focus on "productive" investment.  Back to Draghi "This innovation gap also translates into a gap in overall productive investment between the two economies, which is driven mainly by lower investment in tangible ICT assets and in software, databases and intellectual property".

GDP and health: stocks, flows, output and outcomes

 Interesting discussion at Imperial today.  

1. The health of a nation can be thought of as an outcome (e.g. premature death) and/or a stock (the number of heavy smokers) and/or a flow (number of operations performed per year). 

2. GDP is a flow.  It is the flow of output via people purposefully employed in producing that output flow.  It isn't outcomes.  So a healthy society via social norms or parents helping their children produces an outcome but not an output.  The output of health is operations done, patients seen.  Which can of course be measured better.

3. Missing markets.  Well, people at home are producing things as well.   Not only with modern working from home, but reading to children, looking after family all of which produces a flow of services.  But, we don't typically have that included in GDP since we don't know what price to allocate to that activity, since it's not an activity that's sold in the market.  We could make some assumptions e.g. by taking the market price of a carer working for a care home but typically we don't do this. 

4.  So, GDP doesn't necessarily measure well-being.  

5. In our Indigo Prize essay we explain more on GDP as a flow, adding up the flow of iPads, pencils and 737s, and going beyond GDP.  And the ONS produces a dashboard of health outcome indicators. 

Price indices

The House of Lords has a report on the problems with the RPI (Report: Measuring Inflation (PDF).  They have a neat box explaining some of the formulae effects, Box 4.

The data are below.  The purpose of a price index is to find out if prices have risen or fallen over a period.  (Digression: note 9 explains this wonderfully: 

The Bishop had been tasked with determining whether a 15th century stipulation by an Oxford college—that a fellow of the college must vacate his fellowship if his annual income exceeded five pounds—should still be adhered to. He investigated the change in the value of money over the period by assessing changing price levels and found that five pounds in the mid-15th century was worth 25 to 30 pounds in the late 17th century/early 18th century. He concluded that the intention behind the 15th-century stipulation was to allow for the changing value of money. Robert O’Neill et al (2017), Inflation: History and Measurement, Palgrave Macmillan.)

 Returning to the Box, as can be seen the price ratios are a mix of rises and falls.

Box 4.

For the purposes of illustration, it is assumed that there are four varieties of potato available in shops: Charlotte, King Edward, Maris Piper and Vivaldi. The table below shows the price of each variety in October 2017 and October 2018, and the percentage increase/decrease in price, expressed as a ratio, between the two periods.

Variety	Price in Oct 2017 (£)	Price in Oct 2018 (£)	Price ratio
Charlotte	2.00	1.90	0.95
King Edward	2.00	1.60	0.80
Maris Piper	1.80	1.89	1.05
Vivaldi	2.00	2.50	1.25

And when you use different indices, you get different results

• Carli: the price ratios are added together and divided by the number of products: (0.95 + 0.80 + 1.05 + 1.25) ÷ 4 = 1.0125
• Dutot: the ratio of price averages in October 2017 and October 2018 is calculated:
  Average price in Oct 2018: ((1.90 + 1.60 + 1.89 + 2.50) ÷ 4) = 1.9725
  Average price in Oct 2017: ((2.00 + 2.00 + 1.80 + 2.00) ÷ 4) = 1.95
  Ratio of average prices: 1.9725 ÷ 1.95 = 1.0115
• Jevons: the price ratios are multiplied together and the 4th root is taken: (0.95 × 0.80 × 1.05 × 1.25)1/4 = 0.9900

In this example, the Carli and Dutot formulas produce a 1 per cent average price increase in potatoes over the period whereas the Jevons formula produces a 1 per cent decrease.

Innovation measurement : a survey

Bronwyn Hall has a very nice piece that I only just saw as part of an overall high-level EU panel.  She comes out in favor of the growth accounting approach that I have been working on.