Robert Barro says we double-count investment

Here is the VoxEu piece, excerpt:

Gross or net product includes gross or net investment when it occurs, and includes the corresponding present value a second time when additional rental income results from the enhanced stock of capital. Thus, from the standpoint of the intertemporal budget constraint for consumption, aggregates such as GDP and national income overstate the resources available for consumption.

I quantify the double-counting problem within a standard model used by economists, the steady state of the neoclassical growth model (Barro 2019). With reasonable parameters, GDP overstates the potential for consumption by 28%, while national income exaggerates this potential by 9%. Thus, for example, in international comparisons, countries that invest and save larger fractions of their incomes artificially appear to be too rich when gauged by per capita GDP.


Using typical parameter values, the capital income share based on GDP is around 40%. With the conventional adjustment to allow for depreciation, the computed capital income share for national income is reduced to 24%. With the additional adjustment to calculate permanent income, the share falls further, to 16%. Hence, the proper accounting treatment of investment makes a major difference in calculating the division of aggregate income between capital and labour.

I wish I knew this area of national accounting better than I do — opinions?

Here is the full NBER working paper.  All via Ilya Novak.


Comments for this post are closed