Oh dear, oh dearie me

For instance, if ores are mined and processed at home, these raw materials, as well as the machinery and infrastructure used to make finished metal, are included in the domestic material consumption accounts. But if we buy a metal product from abroad, only the weight of the metal is counted. So as mining and manufacturing shift from countries such as the UK and the US to countries like China and India, the rich nations appear to be using fewer resources. A more rational measure, called the material footprint, includes all the raw materials an economy uses, wherever they happen to be extracted. When these are taken into account, the apparent improvements in efficiency disappear.

The paper is here.

And it’s wrong, horribly wrong, as engineers writing about economics so often are.

They’ve forgotten, or don’t know, that imports are deductions from GDP.

Here’s their set up.

So domestic minin’ ‘n’ stuff adds value, great. But nowadays people get a lot of their raw materials from elsewhere. So, say, copper. Used to be, the mining, processing then manufacturing of copper items were all in one country, leading to GDP of 100 (made up number). Today, we’ve still got GDP of 100, but only the manufacturing is done domestically. The mining and refining is done somewhere else.

OK, shrug.

But the complaint is that now we do not include all that mine spoil and energy and so on to do the mining and refining in the resource consumption to reach that 100 in GDP (and this obviously also works if GDP is still rising). So, we’ll be overstating the manner in which resource use is declining, or not rising as fast as, GDP.

OK, all true, shrug.

The bit they’re missing: imports are a deduction from GDP.

So, GDP is still 100 but now we import the finished copper from which to do the manufacturing. If value add were remaining constant then GDP would actually be 100 minus the 25 of the production of the copper. So, GDP would be 75, and GDP in the exporting nation would be 25.

But that’s not what we see, not what they’re reporting either. They’re saying GDP is still 100. Which it is: and the same total amount of resources are being used, which they are. But they’re not counting that 25 deducted from GDP nor the 25 added to exporting GDP.

That is, they’re missing that total GDP is now 125, 100 domestically and 25 from the exporter, from the same use of the same material resources. Thus we do have the decoupling they say we don’t, because GDP in toto is rising faster than resource use.

They’ve just missed out a basic piece of GDP accounting.

Sigh.

7 thoughts on “Oh dear, oh dearie me”

  1. Not just engineers also why being an accountant doesn’t mean you know how gov’t/state accounting works, starting to feel sorry for a certain ex accountants economic students.

  2. I tried to write a better comment but have found that I lack the knowledge to express what I feel is to be the case here.

    My assumption is that although the authors made a serious error in understanding how GDP is calculated the basic premise is still correct. Social demands such as environment laws and workplace safety as well as labor costs and taxes will skew GDP figures higher. Recycling and market saturation should lower the figure.

    Since El Reg decided to change directions I feel I’ve lost one of the few forums that increased public knowledge without paywalls. Is there any site that is willing to pay you for an in depth analysis of the mine to market costs for producers in different countries?

    If there isn’t one out there then I guess I have to figure out how to create a profitable news site worthy of the conversation. Hmmm…how do I make the average cat pic fan think logically?

  3. Yup, they’re all engineers. I’ve written to the lead author, trying to get him to explain how they have dealt with this but not sure if I actually expect a response.

  4. A bit like economists writing about engineering. Exhibit A: your damned nonsense about tin whiskers t’other day.

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