iPhonenomics: The economics of the iPhone

iPhonenomics: The economics of the iPhone

Apple unveiled several products on Sept. 9, but the star of the attraction was of course the latest iteration of its iPhone. You can make several economic observations about the multinational tech giant’s smartphone.

For one thing, it is amazing how much a single product can contribute to even the world’s largest economy. After the previous iPhone came out around this time last year, investment bank JPMorgan Chase’s chief U.S. economist Michael Feroli estimated that iPhone sales were adding one-quarter to one-third of a percentage point to the annualized growth rate of the gross domestic product (GDP).

Apple has sold 220 million iPhones at $650 per unit on average over the past year. However, to determine the iPhone’s contribution to the U.S. economy, we would need to calculate not revenues, but value added. A unit costs Apple $200 to produce. Making the simplifying assumptions that all of these costs are imported, and that all of Apple’s workers are in the U.S., a phone’s gross margin of $450 would be equal to its value added. The total value added of the iPhone would then be $99 billion, or 0.58 percent of the $17 trillion American economy.

However, this is not Feroli’s original claim. To calculate the iPhone’s contribution to growth, we would need to know the quarterly increase in sales. In any case, we would also need to take into consideration the ripple effect of spending on data plans, accessories, apps and the like iPhone sales generate - what economists call “multiplier effects.” On the other hand, you should also remember 19th century economist Frédéric Bastiat’s “fallacy of the broken window”: Money spent on a broken window could have been spent on something else.

In any case, the iPhone reveals much more about the global economy than the American economy. For one thing, its production process illustrates global value chains (GVCs); the rare earth minerals used in iPhone parts are mined in Mongolia, whereas the parts themselves are made not only by Asian electronics giants in Japan, Korea and Taiwan, but also by Europe’s largest semiconductor chip maker. The phones themselves are assembled in China. Turkey figures nowhere in this production chain, as the country has not managed to be part of GVCs.

However, our glorious nation can claim its share of iPhone glory by being the second most expensive country, after Brazil, to buy one. Whereas an average iPhone costs around $650 in the U.S. and Canada, it is priced over $1,100 and $1,000 in Brazil and Turkey, respectively. That amount would make up only 1.6 percent of the median household income in the US, but 9.5 and 7.2 percent in these countries - and 39.3 percent in the much poorer Indonesia.

The high prices are almost entirely because of high tariffs and import taxes, reflecting the difficulty of doing business in both countries. However, despite their challenging investment climates as well as dwindling economic prospects, Brazil and Turkey are the only countries with Apple stores in their regions, which, in a way, reflects their largely unrealized potentials.

The question of whether those potentials could ever be realized is entirely different matter, though - especially as long as one of these countries has a president who dismissed last year’s iPhone as being “the same as the last.”