How does advertising contribute to social welfare? It raises the awareness about products, and thus should increase utility of people. But there is also some waste of resources when competitors outdo each other with advertising. Think for example of all the resources devoted by Coca-Cola and Pepsi to sway user between two essentially identical products. So, in the end, is advertising good or bad?
Benedetto Molinari and Francesco Turino point to a positive correlation between GDP and advertising in the OECD and try to rationalize this within the Neoclassical growth model. They find that the impact of advertising is rather through the labor supply. As individuals want to consume more, they need to work more to generate the necessary income. This increases GDP (8% for the US) and utility. And as advertising itself amounts to about 2% of GDP in the US, the net contribution to GDP remains strongly positive, at least at current levels.
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