Monday, October 29, 2012

Some quirks of national income accounting

In 2011 real GDP was 6.8% lower than the peak recorded in 2007.  In 2010 prices, real GDP was €170.4 billion in 2007 and was down to €158.7 billion in 2011.  With net exports making a positive contribution to GDP growth over the period the collapse in the domestic economy is masked in the headline fall in GDP.

Domestic Components of GDP

Sometimes when trying to find patterns in the data one discovers some of the ‘quirks’ of national income accounting.  This graphs shows subcategories from the ‘Consumption’ and ‘Investment’ components above which contributed to the rise and fall of GDP over the past decade.

Selected Components

Neither are major components of GDP.  In 2007, their total made up just 5% of GDP but by 2011 they provided just 3.2%, indicating a faster fall than for the overall GDP number over the period.  Here is a chart of them in nominal terms where the collapse in the ‘investment’ category is even more accentuated.

Selected Components Nomninal

The component of consumption is ‘expenditure outside the state’ and is spending by Irish residents on goods and services that takes place outside of Ireland.  This is a contribution to GDP as consumption is defined as:

Final consumption expenditure consists of expenditure incurred by resident institutional units on goods or services that are used for the direct satisfaction of individual needs or wants or the collective needs of members of the community. Final consumption expenditure may take place on the domestic territory or abroad.

Since 2008, real expenditure outside the state by Irish residents has fallen 32%.  Spending less money abroad may mean more money available for expenditure in Ireland.  The drop in household income means this substitution is not happened and consumption expenditure by Irish residents in the state is also falling. 

Still, it is somewhat noteworthy that the drop in something which would expect to harm other economies (where the spending was happening such as places like this) is actually recorded as part of the drop in Irish GDP.  Opposed to that, it can be said that less spending (regardless of where it happens) means less consumption of goods and services which means less satisfaction and well-being for people.

The fall in the subcategory of investment included in the graph has been even more dramatic and since 2006 in real terms is down 86%.  The ‘costs associated with the transfer of land and buildings’ include conveyance and other professional costs of property transaction as well as estate agents’ fees.  However, the biggest item in this was Stamp Duty.  The definition of gross fixed capital formation says:

3.111 . For both fixed assets and non-produced non-financial assets, the costs of ownership transfer incurred by their new owner consist of:

a) charges incurred in taking delivery of the asset (new or existing asset) at the required location and time, such as transport charges, installation charges, erection charges, etc.;

b) professional charges or commissions incurred, such as fees paid to surveyors, engineers, lawyers, valuers, etc., and commissions paid to estate agents, auctioneers, etc.;

c) taxes payable by the new owner on the transfer of ownership of the asset.

In 2006, the ‘costs associated with the transfer of land and buildings’ was €4.5 billion in nominal terms.  The amount of Stamp Duty collected from land and property in the same year was €3 billion.  Unsurprisingly, this has collapsed since and in 2010 just €0.2 billion of Stamp Duty was collected from land and property transactions, a drop of more than 90%. In 2011 the ‘costs associated with the transfer of land and buildings’ contributed less than €0.4 billion to GDP.

Perhaps surprisingly, Stamp Duty from all property transactions is included in GDP.  In general, second-hand house sales do not contribute to GDP as the purchase of the asset by the buyer is offset by the sale of the asset by the vendor.  Sales of new houses do add GDP as there is a net addition to the capital stock and the collapse in purchases of new homes by the household sector accounts for much of the 55% drop in real investment seen over the past four years.  However, Stamp Duty and related transaction costs from all property transactions are included in GDP.

Since 2007, real GDP has fallen about €12 billion in 2010 prices.   Using the same prices, real total domestic demand has fallen by about €33 billion (driven by the collapse in investment with smaller falls in final consumption expenditure and net government expenditure on goods and services).  

From the above charts we have seen that around €3.5 billion of this real drop (equivalent to 30% of the fall in GDP and 10% of the drop in total domestic demand) is due to Irish residents spending less money on consumption outside of Ireland and the virtual collapse in Stamp Duty liabilities from land and property transactions.

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