Apple is about to introduce a new iPhone. Michael Feroli at JP Morgan thinks that the introduction of the iPhone 5 will make GDP go up significantly. Why? Feroli estimates sales for the iPhone 5 and adds that to GDP. That can't be right. Even worse, Paul Krugman, thinking like a student in a bad intro-macro class with a homework problem, says GDP will indeed go up. Worse than that, he thinks this has implications for fiscal policy, which got David Andolfatto justifiably perturbed.
The simplest way to think about the introduction of the iPhone 5, is that it's an increase in total factor productivity (TFP). The iPhone 5 does not appear to do anything that its predecessor did not - it just does it better. It seems Apple is just producing more of the thing, quality-adjusted, with roughly the same capital and labor inputs. In a world with flexible prices, real GDP will go up as a result, but the increase has to be very small - certainly much smaller than the JP Morgan estimate. But what happens in a world with sticky prices - the world in which Krugman lives? GDP is demand-determined, and demand does not change as a result of the change in TFP, so the change in GDP is zero. Further, employment falls, as we can now produce the same quantity of output with less inputs. This is surely not something Krugman would like.