Durable Goods

Durable Goods - Defining

Durable Goods or Durable Products or Hard Goods are products which are either consumed and used or disposed and destroyed after serving usefulness for a long period of time in future.Durables consumption change according to the market.

Sunday, 6 February 2011

Consumer Durable Goods and Its Effect In The Household

The System of National Accounts 1993(SNA93) does not treat consumer durables as investment goods, even though they are generally regarded byindividual households as such. The idea of treating durables as investments has been discussed for manyyears. This accounting practice has also been suggested to be changed during the currently ongoing SNAupdate. The proposal was rejected because it was argued that the issue entails a fundamental change of the production and asset boundaries.

Recently Jorgenson and Landefeld (2006) have recommended that consumer durables be both treated as investments and that this should be reflected in GDP. Also Hulten (2006) relates capital to such expenditure that is made in order to increase or maintain future consumption in contrast with current consumption. The US Bureau of Economic Analysis already treats consumer durables as investments in their capital stock calculations (but does not record the impact of this treatment in GDP). In the US there are actually three alternative measures of personal saving: the National Accounts measure and two versions of flow of funds measures. The broader flow of funds measure includes net investment in consumer durables, net flows of government insurance and pension fund reserves, and net saving by farm corporations as the narrower does not include these items. The fact that the US uses different official saving ratios highlights the importance and usefulness of this kind of analysis; this paper seeks to extend this approach for the first time to the EA.The result of this paper is that treating expenditure on consumer durables as investment increases the saving ratio in the EA between 1.0 and 1.8 per cent (the effect varies a lot between Member States from year to year and in some Member States it affects as much as 5 percentage points of household saving in certain years).This is lower than in the US, where the effect has been estimated to vary from 1.0 to 3.0 per cent. In the US as well as in the EA this figure is relatively constant over time. While the effect on the growth rate of household disposable income is unremarkable, the level of disposable income nevertheless increases by around 2.3 per cent and the growth of disposable income decreases annually around 0.5 percentage points.

The effect on the growth rate of disposable income is actually surprisingly large considering that the effect on the level is modest. What is the analytical meaning of this kind of exercise? Fiscal and especially monetary policy makers follow saving ratios. The Federal Open Market Committee systematically refers to saving ratios in their statements and/or minutes. According to the economic analysis pillar of the ECB’s monetary policy the Eurosystem uses a broad range of economic and financial indicators in order to assess the outlook for price developments and the risks to price stability. If households even partially interpret durable goods in their actual behavior as investments, we believe that the saving ratios presented in this paper provide a useful complementary picture on households’ behavior. Consumer durables could be both treated as investments and the impact of this change on GDP recorded in the national accounting framework, either in the actual core accounting system or in separate satellite accounts as proposed by the ISWGNA. Thus, these kinds of alternative saving ratios could be used as aids for decision-making.

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