If a popular musician releases a new album, and there are 1 million legal purchases (say at iTunes) for $10 each, this is measured as a $10 million increase in GDP.
So then it should follow that if an additional 10 million people illegally download the same album, GDP should be increased by another $100 million because valuable new copies have been created.
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And the answer is…
According to Wikipedia, “Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time. GDP per capita is often considered an indicator of a country's standard of living.”
Based on the first sentence, pirated music does not increase GDP because it’s not “official recognized,” but that’s really circular reasoning because maybe it should be officially recognized. If someone pirates music instead of buying it, this causes a measured decrease in GDP but no decrease at all in the standard of living; in fact it creates an increase in the standard of living if in lieu of buying music the person spends the money on something of tangible value.
So we see that GDP is a bad measure of a country’s standard of living because it is bulked up by value transference and purchases of positional goods, and as I mentioned in another recent blog post, it doesn’t measure important things like quality time spent with your family.
I would say that illegal music downloads have led to an increase in the standard of living, because before people could only listen to the music they could afford, but now people who are willing to violate the copyrights of the intellectual property owners (which appears to be violated as commonly as jaywalking in Manhattan) can listen to a huge library of enjoyable music even if they are not rich.