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Opportunity cost of Piracy to GDP

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This is a basic research on the effects of piracy on a country's GDP.

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Christian Llave

III BS ECE

ECE160-A

02 May 2014

Opportunity Cost of Piracy with respect to GDP
The wide-scale acceptance of capitalism has granted producers property rights. These rights
grant freedom of possession and innovation. Market exchange and trade have become more abundant in
market economies compared to economies without property rights such as communist societies. This
promotes the efficient use and circulation of resources which can benefit people in the form of profit.
However, theft by disregarding property rights severs economic productivity by rendering the economy
stagnant because of either loss or blocking the flow of income, money and resources. One form of theft
overlooked by many is piracy.
Piracy as defined by international law has surpassed its traditional definition of violence and
depredation in the high seas. With the aid of the internet and other technological advances, theft of
intellectual property has been added to the definitions of piracy. Globally, file and information sharing has
consumed more space on the internet traffic since the positive growth of infringers on the internet as it
displays the prominence of piracy in the world (Graphs 1-4).
The development and patronization of Piratebay, BitTorrent, and the like made piracy seem
common, normal, or harmless. This is because piracy appears to be a rational way of using resources.
Basically, the only cost of internet piracy is electricity and time. For other forms of media piracy, only the
addition of physical material will add to the cost. The cost of production of the actual product is greater
than the cost of pirating the same product, mainly because of the factors of production spent for the said
product. While piracy seems like an ordinary business, it leaves a dirt trail in the official economy.

(Graph 1) Growth in infringement
November 2011-January 2013
(North America, Europe,
and Asia-Pacific regions)

9567
417

371
297.6
2011

327
2013
3690

Users seeking infringing content

Brandwidth

(Graph3) Growth in bittorrent infringement
November 2011-January 2013
(North America, Europe,
and Asia-Pacific regions)

6692

74

53.61
2011
43.38

57
2013
1940

Users seeking infringing content

Infringing Bittorrent Brandwidth

This can be explained through the Gross Domestic Product (GDP), which can be modeled as the
sum of all income from the members of the society, sum of all output from different sectors of the society,
or sum of spending on goods and services produced by residents. Generally, the components affecting
GDP are private consumption, investment, public spending, change in inventories, and the difference
between export and imports. The reason why GDP is often conceptualized as an indicator of economic
development is because it connotes how much market participation occurs in a society. High market
participation translates to organized economic activity. Having an organized economy shows efficient
resource management and productivity, which measures the standard of living.
Consider the factors affecting GDP and the effects of piracy as an underground market; the
representation of the calculation for the GDP when observing the effect of piracy may be represented as
GDP = k + private spending, where k is all other factors affecting the GDP. The GDP will surely drop
because of the information and market activity hidden due to piracy. Instead of having an official business
and market flow, there’s dissipation mainly in the aspects of private consumption and public spending,
when the dissipated values could have been factored in. Because of that, the cost perceived by those
who patronize piracy may actually be greater than the benefit than expected.
Although recognized as illegal, the growth of the underground economy persists due to several
reasons, such as the burden of taxes, increased regulation, unemployment, and the decline of civic virtue
and morals towards public institutions. Piracy in the Philippines has even made its way into the people’s
favor and being considered part of Filipino culture. The values lost from the official economy are
significantly high. In 2007, the Philippines was ranked 41 st out of 106 countries for software piracy, having
a rate of 69%. In 2008 the total value for book piracy in the Philippines is $49M. In 2009, music piracy

amounted to $112.1M. At the same year, the Optical Media Board seized over three million pieces of
illegal optical media that amounted to more than a billion pesos (Graph 5). Movie and software piracy in
2011 amounted to $95M and $338M respectively.

Video game piracy amounted to $11.3M in the

Philippine black market. The total black market value of the Philippines is $17.27B.
4,807,012

4,901,112

3,782,759

2,031,541
1,547,483

2005

2006

2007

2008

2009

These values are all within the Philippines, but are not part of the official economy of the country.
These are losses from the Philippine market because they could have been part of the calculation for
GDP. If these values were to be factored in, they would be part of the private spending factor. By the
principle of opportunity cost, choosing piracy yields large amounts of losses from the economy, therefore
leaving the country at a disadvantage. If we reveal another factor in the calculation for GDP, public
spending will also be affected. The fact that these are hidden values that cannot be used by the
government, the revenue for public works and institutional development will miss out on the chance to
have provided something better for the public.
The official economy is suffering from the opportunity to use the said amount, but the most
affected sectors are the producers, such as recording artists and developers. In the music industry,
recording musicians base their profit on the difference between their royalties and costs of production.
They need to cover the costs before getting paid. Assuming the “superstar” phenomenon constant, piracy
cripples a producer’s business because it lessens the quantity sold officially, translating to the amount
returned to the producer. This discourages producers to go into the music industry, which means that
there are fewer producers to participate in the market, severing the calculations of the GDP.
Completely eradicating piracy would seem ideal, but it would aid the country’s economy in terms
of GDP. One way to start is to strengthen the advocacy of enforcement agencies against piracy. The
implementation of the Anti-Camcording Act of 2010 is an example of the movement against piracy. While

regulation is one of the prime ways to decrease the frequency of piracy, studies have shown that more
regulation is correlated with a larger underground market. This means that the government must
emphasize more on reducing the density of regulations or improve law enforcement and regulations,
instead of adding more regulations. Another way to go about it is to legalize some sectors of the
underground economy; however it is more encouraged to stay in the official economy. Further
enforcement of the copyright laws will give a clear perception of the severity and certainty of punishment,
and this will aid in the prevention of piracy. Strengthening surveillance of piracy and its financing can trace
the process of piracy to its roots, therefore reducing frequency.
Another way would be to provide judicial education, enforcement training, and public awareness
campaigns. In the Journal of Business Ethics, a study has concluded that the tendency for someone to
pirate is affected by ethics, moral obligation, perception of benefits, means and frequency of doing the
act. This means that the more informed the people are about piracy and its effects, the less probable
people are to commit it. It also involves having an environment that disapproves of piracy to avoid the
loosening of moral obligation and lessen the frequency of the act. One way to suppressing people’s
tendency to pirate is to disable the means of piracy. To do so, it will require the cooperation of software
and media industries to use technology actively to secure their materials.
Fixing the said reasons for underground markets to propagate is another way to look at the
problem. Cutting down on the burden of tax will decrease prices and will have less of a need for people to
look for pirated products that they consider less costly. Generally, depriving people of purchasing power
too much will increase their chances of participating in the underground market.
Weighing the costs between advocating piracy and advocating official products will give second
thoughts to consumers the next time they choose between original and pirated products. Advocating
piracy essentially supports cheating and violation of rights, which leads to loss and deficiency in the
official economy. Advocating official products, however, translates to the maintenance of a healthy
economy and market attitude; moreover, compared to advocating piracy, the GDP will be higher because
of the relatively less loss in the economic system. Logically, advocating official products will be the more
economically efficient outcomes.
References:
Avery, Peter. The Economic Impact of Counterfeiting and Piracy. OECD Publishing, 2008.
Baumgartel, Tilman. "The Culture of Piracy in the Philippines." Pilipinas: A Journal of Philippine Studies
No. 45 (2005): 1-46.
Bowden, Anna. "The Economics of Piracy." Economic. 2011.

Frey, Bruno S. and Friedrich Schneider. "Informal and Underground Economy." Smelser, Neil J. and Paul
B. Baltes. International Encyclopedia of the Social and Behavioral Sciences. Amsterdam: Elsevier
Science Publishing Company, 2000.
Havocscope. Crime in the Philippines - Risks, Threats, and Criminal Justice Info. 2014. 27 April 2014
<http://www.havocscope.com/tag/philippines/>.
Koch, Jason D., Mike D. Smith and Rahul Telang. Camcording and Film Piracy in Asia-Pacific Economic
Cooperation Economies. Statistical Analysis. Washington, D.C.: International Intellectual Property
Institute, 2011.
Leeson, Peter. "Property Rights." Fraser Forum April 2010: 10-11.
Mankiw, Nicholas Gregory. Principles of Economics. Stamford: Cengage Learning, 2008.
Nationmaster. Philippine Crime Stats. 1998-2014. 27 April 2014 <http://www.nationmaster.com/countryinfo/profiles/Philippines/Crime/All-stats>.
NetNames. "Sizing the Piracy Universe." Piracy Analysis. 2013.
Optical Media Board. Status Report. Pasay, Philippines: Optical Media Board, 2009.
Schneider, Friedrich and Dominik Enste. "Shadow Economies: Size, Cause, and Consequences." Journal
of Economic Literature Vol. 38.No. 1 (2000): 77-114.
"piracy." West's Encyclopedia of American Law, edition 2. 2008. The Gale Group 27 Apr.
2014 <http://legal-dictionary.thefreedictionary.com/piracy>

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