[OPE-L:5733] Re: Question about NIPA

Fred B. Moseley (fmoseley@mtholyoke.edu)
Mon, 17 Nov 1997 10:23:41 -0500 (EST)

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This is a response to Andrew's interesting question last Friday about
"final goods" in the NIPAs.

Andrew has put his finger on an important inconsistency
in the conceptualization of the NIPAs. The NIPAs define
"capital goods" as "final products", even though they
clearly enter into the production of other goods, similar to
raw materials or "intermediate goods". The justification
for this treatment of "capital goods" as final goods is
seldom discussed; it is simply asserted. One place where
there is a one-sentence justification is in a Supplement to
the 1954 Survey of Current Business entitled "The
Conceptual Framework of National Income Statistics."
This Supplement is still cited today as the most complete
discussion of the conceptual framework of the NIPAs.
There we find (on p. 38):

Capital formation is clearly a part of the final
product to the extent that is consists of items that are
NOT USED UP, BUT ARE ADDED TO WEALTH. (Only the inclusion in
gross national product of capital formation for replacement
purposes must be noted as a limitation in this conception.)
(emphasis added).

Thus we see that the justification for including "capital
goods" as final products is that they ARE NOT USED UP IN
THE CURRENT PERIOD - even though they reenter
production and are used up in subsequent periods
(so Allin is right about this in his message a few minutes ago).
The parenthetical sentence acknowledges the inconsistency,
but this inconsistency is then simply ignored.

I think that the way this inconsistency arose is that the
measurment of national income and output began with
the measurement of income - what we know today as the
"income" or "value added" or "cost" approach (the sum of
"factor incomes"). Then the "expenditure" approach was
developed (the sum of C + I + G) and a measure was
needed that would equal the sum of incomes. Since a
part of profit was generally used to purchase "capital
goods," these latter had to be included as "final goods."
But unfortunately, only part of "capital goods" are
purchased with profit. The rest of "capital goods" are
puchased with depreciation. But since it made no sense
to call capital goods purchased with profit "final goods"
and other capital goods "intermediate goods", all capital
goods were called "final goods". And depreciation was
added to the "value added" total as a "non-factor cost" to make
the two sides equal. This last adjustment is the key inconsistency,
it seems to me. The inclusion of depreciation in "value added"
violates the prohibition against "double counting", since this
cost has already been counted, although in a previous period.

Andrew, I hope this helps. How did this question come
up for you?