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If I go for a haircut, am I causing the GDP to rise because consumption is rising?

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    $\begingroup$ Are you paying for the haircut? $\endgroup$ – gerrit Sep 2 at 7:00
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    $\begingroup$ Related: Macroeconomica, SMBC. $\endgroup$ – Nat Sep 2 at 12:31
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    $\begingroup$ Are you comparing this with the situation where you cut your own hair for free? $\endgroup$ – Nayuki Sep 3 at 3:20
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    $\begingroup$ @Nat - I like that cartoon, although I think it's flawed because no-one would give up a hard-earned dollar for a little electron motion (that they can't use as power). $\endgroup$ – paj28 Sep 3 at 9:10
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    $\begingroup$ @Acccumulation If no money is exchanged ,then GDP, which is a measure of money exchange, cannot increase. So yes it's clearly relevant. $\endgroup$ – TylerH Sep 4 at 13:40
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Existing answers are correct, yes, you are increasing GDP.

GDP is a crude measure of how much is spent during a year. This is used as a proxy for living standards (the thinking goes: if an economy is spending more, there's more economic activity and it's probably doing better).

But the logic doesn't always hold, for example:

Consider a scenario where you break my window and I break yours, and we both pay the glazier \$100 each to fix our windows. Our living standards are unchanged, despite the fact that our actions increased GDP by \$200!

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    $\begingroup$ Does that mean that with high-frequency trading, we can increase the GDP by a factor thousand in a matter of seconds? $\endgroup$ – gerrit Sep 2 at 7:01
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    $\begingroup$ @gerrit no, but only because of the definition of GDP excludes financial assets (see point 4 here). The definition excludes financial transactions because its goal is to measure the value of a year's worth of final production (so including them would distort that a lot as you point out) $\endgroup$ – stevec Sep 2 at 7:16
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    $\begingroup$ @Zibbobz your ability to pay to replace broken windows is not a totally unreasonable way to estimate your living standards. The amount of money you have actually paid to replace broken windows is a less reasonable way to estimate your living standards, for pretty much anyone who doesn't own a glass skyscraper. $\endgroup$ – James_pic Sep 2 at 16:52
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    $\begingroup$ @Acccumulation the broken windows example illustrates that a higher GDP doesn't imply a better standard of living. Perhaps an even simpler example could be I pay you $100 to dig a hole and fill it in and you pay me to do the same. Then GDP is up \$200 yet noone is any better off. In such a case GDP measured activity, but did it successfully measure producttivity? Such examples give us reason to be cautious in relying solely on comparing GPD as a measure of productivity / progress. $\endgroup$ – stevec Sep 3 at 3:38
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    $\begingroup$ Your broken window scenario reminded me of this joke : An accountant and an economist are walking through a forest... They encounter a frog. $\endgroup$ – Eric Duminil Sep 3 at 7:51
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Yes, it would (unless you get your haircut at the gray market). GDP is statistics that measures the value of all final goods and services created in a specific period of time.

Because it is a statistics it can only be measured if the transaction is done in a proper market. In a gray economy - economy that is not illegal like the black market but also not official, getting a haircut while paying person indirectly with favor or by giving them money unofficially as to avoid taxes, the haircut would not be counted. However, otherwise, it is included.

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    $\begingroup$ But if this grey market only represents technical accounting difficulties, this doesn't fundamentally exclude it from GDP. There must be ways to estimate the size of grey market, and then it could (and should) be included in GDP. $\endgroup$ – Zeus Sep 2 at 3:59
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    $\begingroup$ @Zeus but GDP is not a theoretical measure it’s a statistical measure. Grey economy is part of output - GDP wants to measure output - but it is just measurement. And yes you are correct there are ways of estimating size of grey economy or even housework etc and there are output measures based on adjusted GDP for these things - but ‘vanilla’ GDP as a statistical measure does not include them at all. $\endgroup$ – 1muflon1 Sep 2 at 9:16
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    $\begingroup$ @1muflon1 isn't it both? Like, you could say that if you give birth at home and don't tell the government and keep your child secret from everyone (don't do this btw) then they're not included in population. But actually they are included in population, it's just that the people who are counting the population missed them, so the actual population doesn't equal the published population. $\endgroup$ – user253751 Sep 2 at 9:34
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    $\begingroup$ @Zeus that's right. It's like asking whether pollution emitted by a factory that falsified its environmental impact statements is still real pollution. It's more difficult to track and investigate but that doesn't make it any less real. $\endgroup$ – Robert Columbia Sep 2 at 14:16
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    $\begingroup$ @jwpfox anyone who defines the population as anything other than the number of people is simply wrong. Now. It can be possible to divide up the population in different ways. You could say First Nations people are part of their respective First Nations(?) and not part of the country of Australia. So you include them in a different population group. But you must include them in the population of the landmass of Australia at least. Because they live there. Anything else is just dumb. $\endgroup$ – user253751 Sep 2 at 16:25
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Yes, the haircut will contribute to the gross domestic product of the country; ‘haircut’ is like any other service that you might avail. However, you will not add, sometimes, the entire amount paid. One will deduct the cost of intermediate goods consumed, to prevent the problem of double counting.

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Any voluntarily transaction (such as going for a haircut) increases GDP. The logic is simple: A sells a good for 100 to B because A values the good to less than 100 while B values it to more than 100. The difference between A's and B's valuation of the good increases the GDP. If A had valued it to more than 100 and/or B to less than 100, A would never have sold it for 100 and/or B would never have bought for 100.

A side note: people are wrong about what GDP is. It is not limited to the legal part of the economy, although it is, for obvious reasons, easier to estimate. It is common that economists try to calculate the full GDP by, by different methods, estimating the grey and black economies. The GDP definition is agnostic for how economic activity takes place.

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    $\begingroup$ No this is completely incorrect. You are confusing GDP with welfare- your answer would apply to welfare not GDP. This is the definition of GDP: “is the total monetary or market value of all finished goods and services produced within a country’s borders in a specific time period.” investopedia.com/terms/g/gdp.asp. What you describe here is not GDP by any standard economic terminology. In fact non-voluntary transactions such as government mandated purchases of insurance are part of GDP etc. $\endgroup$ – 1muflon1 Sep 2 at 10:07
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    $\begingroup$ This does appear to be about welfare (economic surplus) rather than GDP. For example, if you get a haircut that's worth $\$20$ to you (where you'd walk if it cost a penny more) vs. a $\$10$ cost to the barber (where they'd walk if a penny less), then that haircut increases welfare (economic surplus) by $\$20-\$10=\$10,$ regardless of the actual price paid. By contrast, the GDP increases by whatever price is paid (presumably somewhere between $\$10$ and $\$20).$ $\endgroup$ – Nat Sep 2 at 12:47
  • $\begingroup$ "Any voluntarily transaction (such as going for a haircut) increases GDP." Buying a stock doesn't increase GDP. $\endgroup$ – Acccumulation Sep 3 at 3:00
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The answer is yes and no in some cases , in developing countries these type of activities are performed by self employed individual with low capital , and mostly payments done in cash ,and these individuals ( most of them doesn't have tax liability , never file returns , and are not registered, unregulated under state or central authority ) . This activitiy fall under informal sector in developing countries unless they get registered under the respective authority . The informal economy is that part of economy which is not reported in official statistics such as the gross domestic product of a country. The informal economy is not taxed, and includes the black market. In developing countries over 70% of the people work in this form of economy. They are self-employed, because it is difficult to find an employer to hire them. People working in this form of economy have no social benefits or social security, which are usually only given by the state to those who have made tax contributions. Examples include food and flea markets, street vendors, laundromats and the like, mostly in rural or informal areas. It is considered informal since these businesses are rarely registered at national or regional levels, are cash-based and thus do not pay taxes and usually do not have formal arrangements with employees.

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  • $\begingroup$ If anyone are down voting the answer give reason why you think this answer is wrong , because the answer I gave is legitimate one $\endgroup$ – Cherry Sep 7 at 16:13
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Let's first talk about potatoes. Suppose a farmer grows some potatoes and sells them to McDonald's for \$200,000. So this constitutes \$200,000 towards GDP. Clearly, the primary cause of that \$200,000 of value existing is the farmer's work. If McDonald's hadn't bought the potatoes, the farmer could have sold them to Burger King. However, when you look at the tally for the GDP, the sale is what will be listed as what the \$200,000 is coming from. So if you're just looking at what the final event that preceded the increase in GDP is, it's the sale. But it's the farmer's work that is actually the primary cause of the value coming about. So if you ask "Did McDonald's buying the potatoes increase the GDP by $200,000", the answer depends on what you mean by "increase".

Now, back to the haircut. The applicability of the above may be harder to see, because the potatoes existed before the sale, while the haircut doesn't exist until you get it, but the same principle exists. The ability of the cosmetologist to give you a haircut exists before you get a haircut, and you are using that ability up, just as McDonald's is using up the potatoes. Just as those potatoes could have gone to Burger King, the haircut could have gone to someone else. If you pay \$20 for a haircut, you are using up \$20 of value. That's \$20 of value that isn't available to someone else, someone else that could have paid \$20 instead. If someone else had gotten the haircut, the same \$20 would have been added to the GDP. And so the net effect of you getting a haircut is not to increase the GDP by \$20, because it's money that would have gone towards the GDP anyway.

When you engage in economic activity, you move the demand curve (if you're buying) or supply curve (if you're producing). In doing so, you possibly move where the equilibrium price is, and/or how much is sold at that price. It is how much that effect is that is the net effect of your actions on the GDP. So if we're talking about the net effect on GDP, getting a \$20 haircut probably increases the GDP much less than \$20 (one would have to know the elasticities of the curve to know for sure). If you're just interested on the immediate effect, then it increases it by the full \$20.

If someone has a problem with this, I think basic common decency demands that they present their issues in a civil manner, and not post dishonest, nonsensical comments, or merely downvote without any comments at all

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  • $\begingroup$ I see your point now. You're asking the important question "Compared to what?" $\endgroup$ – stevec Sep 3 at 4:16
  • $\begingroup$ I guess to throw a spanner in the works, one could argue the cosmetologist may have been able to perform two haircuts in the time it took to cut the OP's hair (two customers both wanting very quick-to-perform haircuts could have walked right in during that time, and walked out when they couldn't get their hair cut right away and decided not to get their hair cut at all, and not to engage in economic activity in that time), thus the OP getting a haircut could have a negative impact on GDP in opportunity cost terms. It all depends on what assumptions we're going by. $\endgroup$ – stevec Sep 3 at 4:23
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    $\begingroup$ No this is simply incorrect - GDP can be calculated multiple ways - almost commonly by spending approach where all spending is counted, and second most common income approach where all income is counted. Under spending approach \$20 spending on final good as haircut will increase GDP by \$20. Under income approach the |$20 are still counted only they are through persons income. You are confusing GDP with some other economic concepts $\endgroup$ – 1muflon1 Sep 3 at 16:02
  • $\begingroup$ @1muflon1 You are wrong. I explained how you are wrong. You did not address my argument why you're wrong at all. You are being quite rude. $\endgroup$ – Acccumulation Sep 3 at 18:41
  • $\begingroup$ @Acccumulation what argument? you did not made any. $\endgroup$ – 1muflon1 Sep 3 at 18:43

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