Small Data: Would sinking ships hit GDP?

HMS Queen Elizabeth

There are big changes coming to the national accounts next month, writes Anthony Reuben.

I've already written about how illegal drugs and prostitution are going to be included in the calculation of gross domestic product (GDP), which is the measure of all the goods and services produced by an economy.

Another of the changes is to the treatment of "military weapons of destruction and the equipment needed to deliver them".

In the past, government spending on weapons was considered to be just consumption by governments - from next month some of it will count as an investment.

That increased government investment in things like ships, aircraft and tanks will add £3.5bn to GDP for 2009, which is the most recent year for which we have been given figures so far.

The thing is, some of these weapons are very expensive. The recently named HMS Queen Elizabeth aircraft carrier is expected to cost about £6.2bn.

Clearly, we hope this doesn't happen, but if, in some future conflict, it were to be sunk, would that knock 1.6% off that quarter's GDP?

Not necessarily, according to the specialists at the Office for National Statistics (ONS).

Remember, counting weapons as government investments is new stuff to the statisticians - they released a report on how they planned to treat them.

If the ship were to be sold then they would take account of that straight away. But at the moment, the model does not take account of catastrophic losses, so the ship would continue to be written off gradually over its theoretical 20-year lifespan.

But they say that if the loss were really big (like the loss of an aircraft carrier) they might have to adjust the model to take that into account, which would mean there would be a big hit to GDP.

It's an excellent example of how the thinking about GDP is developing to embrace the changes.

And if anyone thinking back to their A-level economics remembers that GDP does not include depreciation, well done - you're right in most cases.

But measuring government output involves taking the sum of its costs, and one of those costs is depreciation. So, at the moment, military assets will be written off over 20 years, however long they actually last.

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