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By Bilal Hafeez 01-08-2019

Double-counting of Investment (VoxEU, 5 min read)

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Robert Barro, Professor of Economics at Harvard, argues that the most widely used measure of economic activity – GDP – is somewhat incorrect. He claims that it includes gross or net investment twice – when it occurs and then further, when additional rental income results from enhanced stock of capital. For example, Tesla builds a battery factory that costs $1bn, lasting for 20 years, over which $3.3bn of revenue is recorded. GDP would then include $4.3bn, whereas it should only count the $3.3bn. Barro proposes an alternative measure: a present discounted value of consumption. And he also shows how it relates to GDP. In addition, he provides a capital income/labour income decomposition for both measures, claiming that current GDP measures overstate capital income’s share.

Why does this matter? Barro joins the chorus of people arguing for new measures of economic activity. However, he doesn’t make clear why his measure is better than say just looking at consumption or why recasting the capital income share is important.

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