4.The effect of iphone5 on US GDP

I repeat here for your convenience the posting from mylearningspace. We talked about it last Thursday; I have updated it by what I have learned since then.

The calculation was not a journalistic mistake, as I thought. It was made by the chief economist of JP Morgan, the largest US bank. Here it is. I wrote to him and got an answer that is cited below.

1. Here is the calculation. Mr. Feroli, the chief economist, expects that 8 million of iphones 5 will be sold in the US in the 4th quarter. He thinks the price will be $600, of which $200 will be imported (they call it "imported cost component" , a typical gibberish of financial analysts). In economics we say that,in the production of iphone, $200 is produced outside of the US (and so does  not count as US GDP) and $400 is produced in the US (and so counts in US GDP). The value of the portion of iphones produced in the US is 8 million times $400 = $3.2billion in a quarter, or $12.8bln in a year. Somehow this becomes 0.33% of US GDP. This is not correct. The US GDP is around $15 trillion so iphone5 contribution to US GDP is a bit less than 0.1%.

2. Should the analyst subtract the number of iphones 4 sold in the 4th quarter of 2011? Of course he should. The contribution to growth is not the level of production, but the change in the level of production.

What is going on? Hard to say. I actually have not seen anything like it before. Everyone made the same mistake, including a Nobel Prize winner Paul Krugman (it is clear from what he writes that he did not check the calculations).

It is a good example of the need to check what you read.
As business students you should be numerate.

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Here is more on this topic. I wrote to Mr. Feroli that I have difficulty replicating his calculations. By my calculations, to increase growth by 0.33% of GDP, i.e. $12 450bln = 0.33% * $3 773bln (US GDP per quarter was, according to IMF, 15 090bln/4=3 773bln), the sales of iphones must be higher by 31 million =$12 450bln/$400 in Q4 2012 than in Q4 2011.

His reply: "Our apple analyst is of the belief that price-cutting on the 4 and 4s will actually lead to some increase in sales of previous generations"

That cannot explain the effect.

Writing this I realized what went wrong. I suspect the following:

JP Morgan took the value of GDP in 2011 ($15 090bln or $3 773bln a quarter),
added 3% for growth of nominal GDP and obtained, for Q4 2012, $3 885bln,
for some reason they divided this by 4 again, obtaining $971bln,
they calculated the value of the iphones produced in the quarter: $400*8 mln =$3.2bln,
dividing $3.2bln by $971bln they got 0.33%.

So there were two mistakes:

1. they got confused by quarters and years

2. they forgot that growth means the difference between this year and last, and calculated not extra growth, but extra GDP.

Well, do not laugh at them. As I wrote, every news organization, plus a Nobel laureate, copied it without noticing the error. Let us call it the Apple Awe

Two definitions of the word awe:

• From Wikipedia: Awe is an emotion comparable to wonder but less joyous, and more fearful or respectful.
• From dictionary.reference.com: an overwhelming feeling of reverence, admiration, fear, etc., produced by that which is grand, sublime, extremely powerful, or the like: in awe of God; in awe of ...

Oh, and one more thing. I found that the number of iphones sold in the US in Q$ 2011 was 11.6mln was 11.6mln.

I am not sure where the 8 million estimate for Q4 2012 came from.