Monday, January 25, 2010

Advertising and GDP

How does advertising contribute to social welfare? It raises the awareness about products, and thus should increase utility of people. But there is also some waste of resources when competitors outdo each other with advertising. Think for example of all the resources devoted by Coca-Cola and Pepsi to sway user between two essentially identical products. So, in the end, is advertising good or bad?

Benedetto Molinari and Francesco Turino point to a positive correlation between GDP and advertising in the OECD and try to rationalize this within the Neoclassical growth model. They find that the impact of advertising is rather through the labor supply. As individuals want to consume more, they need to work more to generate the necessary income. This increases GDP (8% for the US) and utility. And as advertising itself amounts to about 2% of GDP in the US, the net contribution to GDP remains strongly positive, at least at current levels.


Agent Continuum said...

It's good to have an explicit mechanism and a quantitative sense of how ads work but it still doesn't substitute for a good IV whereby we can reject reverse causality, I think.

Harrison Brookie said...

I wonder if it also decreases the costs in searching for the item you want.