[OPE-L] How the imputed rental value of owner-occupied housing can boost GDP

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.


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

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.


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

(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

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

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.


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