Intangible assets and national income accounting

In this paper I focus on three related and difficult areas of the measurement of national income. I argue that the economic theory underlying measurement of these items is currently controversial and incomplete.National income

Economics and the new economy: the invisible hand meets creative destruction

In the 18th century, Adam Smith offered his theory of the invisible hand and the view that perfect competition is the main spur to economic efficiency. The theory of the invisible hand, as it has evolved in modern economic thought, treats creative activity as being outside the scope of economic theory. In the 20th century, Joseph Schumpeter offered an alternative perspective: creativity is an economic activity. He argued that a capitalist market system rewards change by allowing those who create new products and processes to capture some of the benefits of their creations in the form of short-term monopoly profits, a situation that promotes what Schumpeter called "creative destruction." What should the fundamental paradigm of economics be: creative destruction or the invisible hand? In this article, Leonard Nakamura offers some possible answers to this question.[Adobe Acrobat (.pdf)Economic development ; Productivity ; Wages

Advertising, intangible assets, and unpriced entertainment

This paper addresses two aspects of advertising: its role in supporting entertainment and news, and its role as an investment. The author argues that in both roles advertising’s contribution to output is being undermeasured in the national income accounts. In some cases one unit of nominal advertising input should be counted as two units of real output. In rough orders of magnitude, he argues that it is plausible that two-thirds of advertising expenditure represents unmeasured contributions to output, and the level of real GDP should be increased accordingly.Advertising ; Intangible property

Measurement of retail output and the retail revolution

The computerization of retailing has made price dispersion a norm in the United States, so that any given list price or transactions price is an increasingly imperfect measure of a product's resource cost. As a consequence, measuring the real output of retailers has become increasingly difficult. Food retailing is used as a case study to examine data problems in retail productivity measurement. Crude direct measures of grocery store output suggest that the CPI for food-at-home may have been overstated by 1.4 percentage points annually from 1978 to 1996.Retail trade

The retail revolution and food-price mismeasurement

If a product sells for $3 this week at the local supermarket and$2 next week, what is the "real" price? What if that same product has a different price at a different store? Thanks to scanner technology, food prices differ a lot these days because they can be changed quickly and easily. How do our official statistics take these price movements into account? Not too well, according to Leonard Nakamura. In this article, he describes the retail revolution of recent years and how it has led to mismeasurement of food pricesConsumer price indexes ; Food prices

Education and training in an era of creative destruction.

Over the course of the 20th century, the U.S. economy has moved from rote to creativity, from a mass production workforce to a white-collar workforce whose focus is developing new products for sale. In the process, economic change has been accelerated, so that our educational process and goals are increasingly inappropriate. As an example, even the intensive education of medical doctors is inadequate to the current pace of change. In this paper, the author delineates the impact of the electronic revolution that has automated routine and made creativity more profitable and therefore more powerful. The author examines the high school movement (1910-1940) and the college movement (1940-1970) as successful responses to technological challenges that increased equality. The author then attempts a tentative discussion of the electronic revolution's impact on the educational process.Education

The measurement of retail output and the retail revolution

The computerization of retailing has made price dispersion a norm in the United States, so that any given list price or transactions price is an increasingly imperfect measure of a product's resource cost. As a consequence, measuring the real output of retailers has become increasingly difficult. Food retailing is used as a case study to examine data problems in retail productivity measurement. Crude direct measures of grocery store output suggest that the CPI for food-at-home may have been overstated by 1.4 percentage points annually from 1978 to 1996.Consumer price indexes ; Prices ; Retail trade

Credit ratings and bank monitoring ability

In this paper, the authors use credit rating data from two Swedish banks to elicit evidence on banks' loan monitoring ability. They test the banks' ability to forecast credit bureau ratings, and vice versa, and show that bank ratings are able to predict future credit bureau ratings. This is evidence that bank credit ratings, consistent with theory, contain valuable private information. However, the authors also find that public ratings have an ability to predict future bank ratings, implying that internal bank ratings do not fully or efficiently incorporate all publicly available information. This suggests that risk analyses by banks or regulators should be based on both internal bank ratings and public ratings. They also document that the credit bureau ratings add information to the bank ratings in predicting bankruptcy and loan default. The methods the authors use represent a new basket of straightforward techniques that enables both financial institutions and regulators to assess the performance of credit ratings systems.Credit ratings ; Risk assessment

Bench Mark Revisions and the U.S. Personal Saving Rate

Initially published estimates of the personal saving rate from 1965 Q3 to 1999 Q2, which averaged 5.3 percent, have been revised up 2.8 percentage points to 8.1 percent, as we document. We show that much of the initial variations in personal saving rate across time was pure noise. Nominal disposable personal income has been revised upward an average of 8.3 percent: one dollar in twelve was originally missing. We use both conventional and real-time estimates of the personal saving rate to forecast real disposable income, gross domestic product, and personal consumption and show that using the personal saving rate in real-time would have almost invariably made forecasts worse. Thus while the personal saving rate may contain information about later consumption once we know the true saving rate, as Campbell (1987) and Ireland(1995) have shown, as a practical matter, noise in the U.S. personal saving rate makes it uninformative for forecasting purposesPermanent Income, Saving, Real-time data

Mismeasured personal saving and the permanent income hypothesis

Is it possible to forecast using poorly measured data? According to the permanent income hypothesis, a low personal saving rate should predict rising future income (Campbell, 1987). However, the U.S. personal saving rate is initially poorly measured and has been repeatedly revised upward in benchmark revisions. The authors use both conventional and real-time estimates of the personal saving rate in vector autoregressions to forecast real disposable income; using the level of the personal saving rate in real time would have almost invariably made forecasts worse, but first differences of the personal saving rate are predictive. They also test the lay hypothesis that a low personal saving rate has implications for consumption growth and find no evidence of forecasting ability.