I’m going to warn you right up front. This post is being written on the Saturday evening of Labor Day weekend. I’ve had a tough day (don’t ask). I’m writing about a topic that no one is going to care about, but is in fact very important.
Let’s start: The Bureau of Economic Analysis publishes quarterly statistics on “corporate profits” and “corporate profits of domestic industries.” Corporate profits of domestic industries are used to calculate Gross Domestic Income, which is should be equal to Gross Domestic Product. (To see a little discussion of GDI, see this James Hamilton article and here).
Here’s the question: Suppose a U.S. company discovers that the cost of importing a good or service is less than the cost of buying it from a domestic producer (or making the good or service itself). The executives of the company decide to boost profits by offshoring production of that good or service.
Should that increase in profits be treated as an increase in “corporate profits of domestic industries”? And by extension, should that count as an increase in GDI? And by extension, GDP?
Discussion beneath the fold.
Suppose you believe the answer is yes, that an increase in profits because of offshoring should be counted as an increase in domestic profits. The problem is this: You can imagine offshoring manufacturing, and keeping R&D, marketing, finance, and strategic planning in this country. Now suppose it becomes cheaper to do R&D in China, so you move R&D overseas and increase profits again. Now it becomes cheaper to do marketing and finance in Paris and London, so you move those operations overseas as well, at each step increasing corporate profits. Finally you are left with one executive and one janitor in the New York City office.
Should that hollowing out all count as domestic profits?
This is actually a big deal.