Suppose you bought a new house in the year of 2010. Then the price of the house in counted toward the 2010 GDP. Say then you live in the new house in the following years. So in these years, the GDP includes the housing rental you paid yourself. But then why is it not an overcount? I mean, when we counted the house price into GDP in2010, we have already counted all the utility of the house in one year and there is no need to count the de sequent rental.
$\begingroup$
$\endgroup$
Add a comment
|
2 Answers
$\begingroup$
$\endgroup$
You are correct that what you describe would be an overcount, but fortunately, your description of what is counted in GDP is incorrect. When a new home is constructed and sold, the full sales price is not counted in GDP. Instead, only the value of the construction put in place is counted in GDP— when the construction is completed. Then, the value of the stream of housing services (i.e., the imputation for owners' equivalent rent) is counted annually as an output of the asset.
Quoting "How BEA Accounts for Investment in Private Structures":
In the NIPAs, private investment in new construction is measured mainly as the sum of the costs of inputs of all construction “put in place,” that is, all construction activity completed in a given period. For individual projects, BEA’s measure of investment in structures includes the following:
- Cost of materials installed or erected
- Cost of labor and the cost of construction equipment rental for the period
- Cost of architectural and engineering work
- Miscellaneous overhead and office costs incurred by the project’s owners
- Interest and taxes paid during construction
- Contractors’ profits
Houses are therefore counted just as any other capital asset is. Just as a machine that makes bolts first appears in GDP when the machine is constructed then later its output is also counted, a house appears in GDP as output when it is constructed (or renovated) and its output— housing services— is also counted.
answered Sep 13, 2015 at 17:08
$\begingroup$
$\endgroup$
To add a simple analogy: Take a solar farm that was constructed in 2010. Its construction was included in 2010 GDP.
But the electricity it produced in 2011 was also included in 2011 GDP; the electricity it produced in 2012 was also included in 2012 GDP; etc.
The construction of the solar farm is analogous to that of the house. And the electricity generated by the farm is analogous to the rental services generated by the house.