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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.

Wednesday, 16 February 2011

The Effect Of Durable Goods On The Growth Globally


The present System of National Accounts (SNA93) treats durable consumption goods as
consumption goods rather than investment although rentals for owner occupied households is imputed into GDP. We argue that households de facto treat the purchase of durable goods as investments and thus, the treatment of durables as capital assets conceptually does not differ from the present treatment of owner occupied dwellings. This is not captured by the economic analysis based on current statistical conventions.

The purpose of this paper is to estimate the effect of durable goods and ICT on euro area economic growth and productivity change; when expenditure on consumer durables is recorded as capital investment. The capitalization of consumer durables impacts both the levels and growth rates of the capital stock, productivity and GDP. Our growth accounting computations demonstrated that the capital services of durables contributed one-tenth of economic growth and one-eight of labour productivity growth in 1995-2004. ICT's impacts were larger, i.e., one-fifth of GVA growth and one-sixth of labour productivity growth.

The purpose of this paper is to estimate the effect of durable goods and ICT on euro area (EA) GDP growth and productivity change from 1995 to 2004. In this exercise expenditure on consumer durables is recorded as capital investment. This impacts both the levels and growth rates of the capital stock, productivity and GDP. The advantage of this treatment is that it makes the treatment of consumer durables symmetric to that used in the Systems of National Accounts to account for owner occupied dwellings. As we also account for the effect of ICT the true proximate sources of growth are highlighted.

We argue that households de facto treat the purchase of durable goods as investments. However, this is not captured by the economic analysis based on current statistical conventions. The present System of National Accounts (SNA93) treats consumer durables as a part of private consumption, whereas Dale Jorgenson consistently treats consumer durables as capital inputs both on the output and the input sides. Charles Hulten recently defined investments as such expenditures that are made at the expense of current consumption in order to increase or maintain future consumption.

The results of this paper also show that the new treatment of consumer durables increases annual GVA growth by 0.08 percentage points and labour productivity growth by 0.07 percentage points as the new growth of gross value added (GVA) is two and labour productivity growth is 1.2 per cent. Furthermore, our growth accounting computations demonstrated that the capital services of durables contributed one-tenth of economic growth and one-eight of labour productivity growth. It was no surprise that ICT's impacts were larger, i.e., one-fifth of GVA growth and one-sixth of labour productivity growth.

The combined contribution of ICT and durable capital deepening is the most important component of EA labour productivity growth. The role of other capital deepening is nearly as big. Previously we thought that the deepening of other capital carried by far the largest contribution.

As the outcome of this paper is that the alternative treatment of durable goods as well ICT has a considerable effect on economic growth and productivity, it is not difficult to find a policy recommendation or justification for this paper. This paper emphasises that in fiscal as well as ECB.

The reclassification of durable goods has an effect on GDP. The reallocation of consumer durables to gross fixed capital formation (instead of private consumption) increases output (and possibly intermediate consumption), since investment from the output approach point of view provides a service flow to production. From the income approach point of view this treatment affects two components: operating surplus and consumption of fixed capital. Together these effects are by definition exactly the same size as the service flow effect of the output approach. From the expenditure point of view, durable goods should first be re-classified from private consumption to investment. Second, the value of the service flow has
to be classified as private consumption.

The capitalisation of durable goods has also been suggested to be considered during the currently ongoing SNA update. The proposal was rejected because “consumer durables are not regarded as assets in the system because the services they provide are not within the production boundary”. However, the Inter-Secretariat Working Group on National Accounts proposed to record capitalised consumer durable goods in satellite accounts. Moreover the group recommended showing consumer durable goods as a memorandum item in the balance sheet but not in the totals of non-financial assets.

There are five sources of labour productivity growth. The first one is durable goods' capital deepening, i.e., the share weighted increase of durable good capital services per hour worked. The second source is the share weighted deepening of ICT capital. The third source is the share weighted deepening of other capital. The fourth component is the improvement in labour quality, which is defined as the difference between the growth rates of labour services and hours worked, multiplied by labour’s income share. The fifth component is a general advance in multi-factor productivity, which increases labour productivity point for point.

The EA aggregate is a simple aggregation of available EA Member States (EA-MS).
However, the EU KLEMS database does not include data for all the EA-MS, i.e. Greece, Ireland, Cyprus, Luxembourg, Malta, Portugal and Slovenia do not have any data available in the database. Since Slovenia is a member of the EA only since 2007, and Cyprus and Malta since 2008, it is not necessary to include them in the analysis. Thus, Greece, Ireland and Luxembourg are the only countries for which no data is available and they represent approximately five percent of the EA-GDP in 2006. Therefore, levels in this paper are underestimated by approximately five percent.

The private consumption data is the so-called “Table 5 data” of the ESA 95 transmission programme. This data is available for almost all of the MS. The detail of the data is the two-digit level of the COICOP classification. As discussed later this data is broken down in more detail to estimate the share of durable goods. Unfortunately, more detailed data than 2-digit level data is not available from the international databases. The data is not PPP corrected and therefore, we had to perform the PPP correction ourselves. This has been explained in more
details in the following sub-section.

Stocks of consumer durables

Private consumption can be divided into services and goods that can be classified durable, semi-durable or non-durable. Owing to the lack of detailed expenditure data on durables, we used the same annual shares of consumer durables in each two-digit COICOP consumption group as in our previous work (see table 1) and multiplied these shares with the national two-digit current price consumption expenditure figures of the EA countries.

Estimation of output and value added

In this paper, consumer durables are treated in the same way as imputed rents in the national accounts. In principle, the logic of capitalising durable goods follows exactly the same logic as imputed rents. The SNA postulates that heads of households who own the dwellings that the households occupy are formally treated as owners of unincorporated enterprises that produce housing services consumed by those same households. As well-organised markets for rented housing exist in most countries, the output of own-account housing services can be valued using the prices of the same kinds of services sold on the market, in line with the
general valuation rules adopted for goods or services produced on one’s own account. In other words, the output of housing services produced by owner-occupiers is valued at the estimated rental that a tenant would pay for the same accommodation, taking into consideration factors such as location, neighbourhood amenities, and so forth, as well as the size and quality of the dwelling itself.


The weights of alternative rates of return for durable goods have been calculated from the annual Monetary Union Financial Accounts (MUFA). Three different categories of assets have been used in the calculation: currencies and deposits, shares, and debt securities (including mutual funds). The returns of the currencies and deposits were calculated by using one-month Euribor (Euro Interbank Offered Rate). The returns of shares were calculated by using the Dow Jones Euro STOXX price index, and finally, the returns of debt securities were calculated by using the three-year EA Government benchmark bond yield.


Treating consumer durables as investments has a surprisingly large impact on the level of EA gross value added. The ratio of the output of consumer durables to unrevised GVA (both at current prices) varies between 6.45 and 9.64 per cent annually. On average it is 8.03 per cent in the years 1995-2004 (table 3). The GVA impact is lessening towards the end of the period since the output of consumer durables only stayed level although nominal GVA increased by a quarter in the decade we are observing. The impact of consumer durable assets on the EA
capital stock cannot yet be estimated since the capital stocks underlying the capital service calculations have not been released in the EU KLEMS database.According to the growth accounting results published by the EU KLEMS consortium in November 2007 the EA gross value added (GVA) grew in volume terms on average by 1.92 per cent annually in the years 1995-2004 (table 4). This growth stemmed nine-tenths from the combined effect of the inputs and the rest was attributed to multi-factor productivity (MFP) . One third of economic growth came from labour services and almost sixty per cent from capital services (of which twenty percentage points was related to ICT capital services). Capitalising durables does not radically alter our general perception of the proximate sources of EA economic growth. The relative contributions of the inputs and the
residual remain similar. There are, however, important differences. Economic growth was actually faster than previously perceived (2.00 per cent annually and not. Furthermore, the capital services of durable goods were one-tenth of economic growth. This naturally implies that the contributions of the other inputs were lower.


Another way of looking at economic growth is to decompose it into the impacts of labour input and labour productivity (table 5). Hours worked increased in the observation period at the brisk rate of 0.79 per cent per annum. The new treatment of consumer durables boosted economic growth by 0.08 percentage points annually and labour productivity growth by 0.07 percentage points. Using equation 4 we found that of the new labour productivity growth estimate of 1.20 per cent annually as much as 0.15 percentage points, or one-eighth, was attributed to the share weighted increase of durable good capital services per hour worked by our calculations. One-sixth of labour productivity growth stemmed from ICT capital deepening. Again, the contributions of the other inputs turned out to be lower than earlier
thought. The residual remained unchanged.

Conclusions

The purpose of this paper was to estimate the effects of ICT and durable goods, when they are treated as investments, on EA GDP and productivity growth. The increasing use of technology and the breakthrough of home/entertainment technology in the past few decades emphasises the importance of this kind of analysis. Capitalising consumer durables has a surprisingly large impact on the level of EA economic growth. In relation to unrevised GVA the share is around 8 per cent on average in the years 1995-2004.

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