Wednesday, March 25, 2009

BC Output Gap and the 2010 Games

With the 2010 Winter Games just under a year away, and given that BC is currently experiencing a sharp slowdown if not an outright recession, I though it might be interesting to see how the 2010 Games might help to speed up a recovery. To illustrate, the figure below shows the BC output gap (actual GDP as a percent of potential GDP) with and without the 2010 games.
This assumes that the 2010 games add about 1% to BC real GDP in 2010 and that growth returns to a trend rate of 2.7% in 2011. Now, I know there are those that are not in favour of the Games but I don't think you could ask for a better stimulus plan - it is temporary, targeted, and the timing could not be better. Even more, the stimulus is a mix of of government and private spending and is spread across diverse sectors of the economy.

Whether the Games will have long-lasting impacts beyond 2010, or even if the money could have been spent better elsewhere are open questions, but as stimulus, it is hard to argue against.


Marc said...

I agree that the Olympics are fortunately well-timed, but how do you get an additional 1% of GDP from the Games?

BC's GDP is just shy of $200 billion, so 1% is (for simplicity's sake) $2 billion. As of January 2010 all of the Olympics capital projects will have wound up, leaving just the incremental spending due to the Games themselves.

BC's baseline GDP during the period of the Games is about $8 billion, so you are saying that it will be 25% higher than normal.

Even with a billion-dollar security budget, this is pretty hard to believe since the Games will also slow down a lot of economic activity that would otherwise take place because downtown will be shut down and people will take time off to go see events.

Shock Minus Control said...

BC Real GDP was probably about $166 bilion in 2008. VANOC is gong to spend close to a billion dollars between now and end of Feb 2010. Incremental tourism spending is expected to be ~1.2 billion in 2010. Add multiplier effects (from an I-0 or VAR) and you get to somewhere around 1% added real GDP. It could be less, but it isn't an unrealistic scenario.

Marc said...

Well, OK, but why have model if the underlying math does not make sense.

Real GDP, as in 2002 dollars? Do you pay your mortgage in 2002 dollars? Nominal GDP is estimated to be 198.3 billion in 2009.

GDP attributed to tourism has been around $6 billion per year. It could be that tourism revenues will be an additional $1.2 billion, but that is not the same as value added for the purposes of GDP.

Besides what happens between now and Dec 31, 2009 counts for 2009 GDP, not 2010 GDP and that was the case you were trying to make. You cannot call projects that have been underway for a few years and that are now wrapping up, incremental spending.

Anyway, all very interesting. Some well-timed Olympic Keynesianism. I just don't think it will do much to avert a rapidly slowing economy.

Shock Minus Control said...

I guess I don't see your point on nominal GDP - i'f i'm measuring the contribution of the Games to BC Real Economic growth, why wouldn't I use the same measurement?

I realize that Tourism Revenues are not the same as GDP - but the value added is fairly significant. if the most commonly thrown around estimates are close, i'd guess that between $600 - $700 million in GDP will be realized. Again, add VANOC spending both in 2010 and multiplier effects from spending near the end of 2009, and it isn't hard to come up with a number that is close to 1% of real GDP. It might be less, we'll know for sure about a year from now.

A better question - why wouldn't all of this spending help to speed up the economy? I'd like to hear your thesis.