From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Mon Dec 26 2005 - 18:57:58 EST
Paul Cockshott asked: Why should that be the case. Surely a shift from rented to owner occupied properties will be reflected in a fall in actual rents and a compensating rise in imputed rents. Reply: This is generally speaking correct; the increase in house prices is statistically significantly greater than the increase in real tenant rents, and therefore increasing home ownership will also have the statistical effect of reducing the historical increase in imputed rents to some extent because real tenant rents increase more slowly. Inversely, ig house prices slump, real tenant rents increase. But this does not invalidate the argument offered at all. The imputed rents are included in value-added, but tenant rents, like land, subsoil and finance rents typically are not (except perhaps in the case of farm workers). At issue here, is the way the accounts draw the dividing line between production-related income, and property income considered unrelated to production, within the framework of the statistical definition of production used to define the boundaries of gross output. Paul also commented: Imputed rent may be imaginary, but its capitalization definitely is not - at least from the standpoint of individual agents who can trade in their city center properties for shares and other capital assets. Reply: That is true, and of course owner-occupiers can derive capital gains from their houses. Nobody denies that, and in previous posts I have cited IRS data on realised capital gains for tax purposes, suggesting that in the USA they peaked at 6.5% of GDP (in reality they would be higher). For historical series for the USA, see http://www.cbo.gov/showdoc.cfm?index=3856&sequence=0 However, (1) capital gains" is not the same thing as "imputed rental value", and that rental value estimate is often larger than taxed capital gains realised. (2) Even if the imputed rent is construed as a proxy for capital gains, it is not clear that this has anything to do with the value of output from production; both NIPA and UNSNA exclude capital gains from GDP precisely because they are considered unrelated to value-added. To qualify as value-added, a flow of revenue, expenditure or product sales must be attributable to production, and capital gains do not directly arise from production by definition, but simply from an appreciation of asset value in markets. Conventionally, GDP is measured and validated using an expenditure, income and product approach. This is based on simple axioms such as that total expenditure in the economy must equal total income, and that the value of the product must equal the sum of gross revenue generated by production after deduction of intermediate inputs. Point however is, that this is made true by accounting definitions, and accounting aggregates are computed specifically to conform to these definitions, while in the real world, contrary to the Keynesian identities, the value of the product is not equal to total expenditures or to total income, because in the account certain income and expenditure flows are ruled out from production, and other (sometimes arguably spurious) flows are included. Thus, GDP is essentially an accounting idealisation, an ideal price derived from real prices using a value theory and a theory of what production is. In a previous post, I have also shown how NIPA gross corporate profit deviates from tax-assessed gross profit, because NIPA applies a definition of value-added which rules out some components of real profit and includes other (sometimes arguably spurious) components. The general thing all this illustrates is, that the "value added" aggregate in part reflects real transaction flows and in part reflects a theory of value-creation, leading to imputations and adjustments of real flows. For example, NIPA consumption of fixed capital deviates quantitatively from actual tax-permitted write-offs, because a geometric depreciation schedule is used based on actual observed price movements of assets. Hence the distinction between "economic" depreciation and actual depreciation write-offs, and accounting profit and real profit. You can also consult my simple wikipedia entries on Intermediate consumption, Gross Output, Net Output, Compensation of Employees and Operating surplus for some more details. In reply to Alejandro, I haven't related OOH to final demand, that is yet to come at present. A point often ignored is that the definition of value-added in principle excludes trade in second-hand goods, unless modified prior to sale (in which case you can say "production" takes place, e.g. reconditioned cars). In the real world, globally, trade in second-hand assets is growing. In general, I think that because of - globalisation (increase in international transactions), - the growth of trade in services, - the growth of credit economy - the growth of the shadow (grey) economy - and the strong growth of property income (rentier income), GDP data less and less accurately portray the real national income or the real value of production in the domestic economy. This is already recognised by writers analysing international "value-chains" and "commodity chains" (supply chains) and by taxation specialists. Other writers have argued for a general "goods and services tax" replacing income tax both for efficiency reasons and because at least it would make a whole set of transactions explicit. All of this is not of course a personal criticism of national accountants, who at least take the trouble to compute the data, more a statement about a fact of life. Jurriaan
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