0

Imputations approximate the price and quantity that would be obtained for a good or service if it was traded in the market place. The largest imputation in the GDP accounts is that made to approximate the value of the services provided by owner-occupied housing. That imputation is made so that the treatment of owner-occupied housing in the GDP is comparable to that of tenant-occupied housing, which is valued by rent paid. That practice keeps GDP invariant as to whether a house is owner-occupied or rented. In the GDP, the purchase of a new house is treated as an investment; the ownership of the home is treated as a productive activity; and a service is assumed to flow from the house to the occupant over the economic life of the house. For the homeowner, the value of that service is measured as the income the homeowner could have received if the house had been rented to a tenant.

https://www.bea.gov/help/faq/488

So they're saying that when someone buys a house, an imaginary rent is added to the GDP figure, which inflates the GDP. I am wondering if every country does this, or there are countries that do no such imputations, because you could have one person buy 20 homes, and it would inflate the GDP significantly.

1 Answer 1

5

I am wondering if every country does this, or there are countries that do no such imputations, because you could have one person buy 20 homes, and it would inflate the GDP significantly.

It isn't really "countries" that do this, it is economists. And, GDP has a well-settled consensus definition among economists.

If you excluded imputed rent of use assets, you would be reporting "modified GDP" or some other economic indicator that doesn't have a widely known name.

Not every country does use GDP as an important economic indicator. But the most notable exception to the practice of using GDP as a key economic indicator, Bhutan, isn't very economically or politically important.

Most people who own 20 homes rent them, so actual rent, rather than imputed rent, reflects their contribution to GDP.

But, conceptually, there is really no difference between a rich person who owns 20 homes used solely for personal use (a tiny share of all homeowners that has very little impact on the total GDP figure) and a rich person who owns one really expensive mansion with the same imputed rental value.

Also, while owning 20 homes is unusual, owning 2 or 3 homes is not nearly so uncommon. A family where one spouse lives in Denver and another lives in Portland might have a home in each place, and also a vacation condo in Hawaii. Treating the imputed rental value of the three homes as part of GDP is conceptually consistent and unproblematic.

Some of the gut level concern evident in the question comes from something much deeper, which is that living in an expensive house (rented or owned) contributes more to GDP than living in an identical less expensive house in someplace with lower property values. This seems to be at odds with the idea that GDP captures the aggregate goods and services produced by the economy.

But monetizing everything is at the root of how GDP and similar economic indicators work. Eliminating the imputation of service income for the rental value of use assets wouldn't solve that problem.

Also, it is hard to see how "use assets" that aren't actually used by someone are really contributing to the economy. But for a national statistical measurement, this isn't a very serious flaw, because use assets that get very little use are a small minority of the use assets for which rental value is imputed in computing GDP, and because the percentage of use assets that aren't used doesn't usually change very much.

As long is imputation of the rental value of use assets is done consistently, even if these assets aren't used, this issue doesn't materially change the rate at which GDP changes from one time period to another, or the percentage difference between GDP in one place and GDP in another. And, this is the main way that GDP is used. The exact nominal value of a country's GDP at any given moment in time isn't terribly important.

In this instance, bureaucratic efficiency in calculating GDP outweighs the importance of accuracy in absolute terms.

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .