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    Spending on durables qualifies as consumption?

    Fatih Özatay, PhD03 November 2012 - Okunma Sayısı: 819

     

    Some of the common macroeconomic models take the expenditure on durables as investment expenditures.

    Does the spending on durable goods such as refrigerators, washing machines and automobiles qualify as consumption or investment expenditures? The former, according to international standards; specifically categorized as “consumption of durables.”

    The ratio of private sector consumption expenditures to the gross domestic product (GDP) is significantly higher than the ratio of private investment expenditures to GDP. In 2011 for instance, the share of consumption was 68 percent and that of investment was 22 percent. However, the contributions of consumption and investment to GDP growth are similar as changes in the value of private investments (positive and negative growth rates for investments) are by far higher than those of private consumption expenditures. This is applicable for almost all market economies.

    Another distinctive feature of private investment expenditures is drastic fluctuations: for instance, private investment expenditures shrank by 42.7 percent in the fourth quarter of 2001 and by 31.2 percent in the third quarter of 2009; and rose by 56.2 percent in 2004 Q2 and by 49.5 percent in 2010 Q4. Such drastic year-on-year changes in private consumption expenditures are observed quite frequently. On the other hand, the largest rates of increase and decrease in private consumption expenditures since the beginning of 1998 were 12.9 percent and 10.2 percent, respectively.

    The underlying reason for the difference in the magnitude of fluctuations is evident: your consumption of basic goods does not increase at the same rate as your income grows and vice versa. At best, one tends to consume basic goods of lesser quality in the face of sharp drops in income. The case with investment expenditures is different, however. In periods of strong economic growth, confidence in the prospects of the economy enhances rapidly and a more optimistic mood prevails. This perpetuates the willingness to invest. And there is no point in stringing out an investment decision; it has to take place once and all immediately. In times of economic contraction, on the other hand, pessimism grows and investments drop sharply.

    TURKSTAT should facilitate the analysis

    From this point of view, expenditure on durables such as automobiles and refrigerators is like investment expenditures as both tend to fluctuate sharply. Some of the common macroeconomic models take the expenditure on durables as investment expenditures rather than as consumption expenditures. When we analyze consumption expenditures excluding the spending on durables, we will see that the magnitude of fluctuations would ease to a large extent. Referring to the above example, we would not see a 12.9 percent increase or a 10.2 percent decrease in private consumption expenditures, for instance. In the second quarter of 2012, private consumption expenditures decreased by 0.5 percent year-on-year. If spending on durables was excluded, however, we would not observe any fall.

    Here, the Turkish Statistical Institute (TURKSTAT) can facilitate our understanding of fluctuations in consumption by classifying consumption expenditures under three categories: consumption of durables; semi-durables; and non-durables. They used to employ this categorization and regularly release figures accordingly. They can reintroduce such method and release figures under both models. I think this is necessary to be able to make healthier analyses on our economy.

    This commentary was published in Radikal daily on 03.11.2012

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