The Macroeconomics of Hosting the Olympic Games

We've started off the new term with a new unit in Economics 40S - Economic Indicators. To start off the unit, we looked specifically at Gross Domestic Product (GDP), which the textbook, Working with Economics, defines as "...the value of all final goods and services produced in a country in a given year." GDP helps to measure the health of a nation's economy, because a healthy economy allows for low unemployment and high wages. Macroeconomics looks at a nation as a whole, when dealing within the realms of the economy, as the textbook defines macroeconomics as "...the area of economics concerned with the overall view of an economy, rather than with individual markets."

With that in mind, it is clear that the beginning of this term also marks a spectacular international event - it marks the beginning of the 2014 Sochi Winter Olympic Games. 

So, why host the games, you may ask? The games are not only a great method of promoting tourism and nationalism in a country, and it also helps to increase spending, create jobs, and promote the construction of better infrastructure and transportation systems.

These long-term benefits were especially evident in London, after hosting the 2012 Summer Olympic Games. In fact, in an interview with the Olympics Committee, Mayor Boris Johnson of London praised the games, and said that these games will secure a "lasting legacy" on the capital of England. He noted, "We can secure a transport, housing, infrastructure, sporting, cultural, and social legacy from these games and turn these Games to gold for decades to come." However, this was not just a speculation, as the national GDP of England had finally risen over 1% after the games, after a long period of decline. According to journalist Mark Thompson of CNN, the Olympics had helped to lift the UK out of recession. In fact, British Finance Minister George Osbourne stated that the games had put the UK on the right track on its mend towards economic strength and growth. 

But, what about all this controversy over the heavy financial burden placed on the host cities? 

The grandeur of the Beijing Olympic Games of 2008 had cost the country roughly $40 billion, shocking the international community with the depth of its financial commitment. While $40 billion may seem like an extraordinary amount to be spending on a sporting event to the rest of the world, China did not suffer great financial implications, because, according to an article on Bloomberg Business Magazine, the games only accounted for, on average, 0.3% of China's total GDP each year, hardly significant on a national scale. 

Looking at it from a macroeconomic standpoint, the Sochi Olympic Games, which had cost the Russian government an estimated $50 billion (the most ever spent on the games), did not impact the nation's economy greatly, costing only a mere 2.4% of the national GDP. In fact, the financial impact of the Sochi Olympic Games pale in comparison to the 2004 Athens Olympic Games, which had cost the Greek government roughly $11 billion, or a heavy 7% of their national GDP, according to the same article from Bloomberg Business Magazine. 

So, what's the moral of the story? 

It's simple - don't let the numbers scare you (unless you're looking at the national GDP). In a paper published by Markus Bruckner and Evi Pappa of the London School of Economics and Political Science, it has been shown time and time again that hosting the games generates positive investment, consumption, and output responses, even before the games begin. 

The games unite the international community, bringing people from all corners of the world together to celebrate, compete, and enjoy one another's company. It (generally) strengthens a city's economy, and encourages spending, tourism, and improved services for years to come. It's definitely an investment on a nation's part, but a good one at that. 

In the end, Russia spending $50 billion on the games will not send the country into a recession. However, many economists speculate that Athens spending 7% of its GDP had sparked its economic downfall. 

As you can see, the common misconception that the Olympic Games are a waste of money, and only damages a country's economy, is wrong. Looking at the grand scheme of things, or, looking at it from a macroeconomic perspective, we can see that the financial implications of hosting the Olympic Games do not heavily increase a nation's debt, as long as a moderate amount of money was spent in relation to the nation's GDP. So, the numbers don't matter - it's the percentages that count.