Statistical Effects of Ownership Relations On The Boundary Between Intermediate Consumption and Valu
The statistical boundary between intermediate consumption and value added is affected by ownership relations.
If, for example, an enterprise buys services from other enterprises, instead of producing them in-house, its own value added will be reduced, and its intermediate consumption will be increased.
But because in-house production itself has intermediate inputs, the value of the increase in intermediate consumption that results from in-house production is likely to be less than the value of equivalent services purchased from another enterprise.
Thus, the sizes of total value added and intermediate consumption are affected by the degree to which ancillary activities are either produced in-house by an enterprise, or bought from other enterprises within the domestic economy.
Likewise, rentals paid by a business on buildings or equipment under an operating lease are recorded in national accounts as intermediate consumption, and are excluded from its value-added.
Yet, if an enterprise owns its own buildings, machinery and equipment, most of the costs associated with their use are not recorded under intermediate consumption; depreciation charges are included in gross value added, and interest costs, both actual and implicit, are included in net operating surplus. Only the expenses of materials needed for physical maintenance and repairs to buildings and equipment appear under intermediate consumption.
Consequently, if businesses decide for economic reasons to rent more physical assets, or alternatively buy more physical assets, this can independently affect the size of GDP components and the size of intermediate consumption. If they buy, this boosts GDP; if they rent or lease, this lowers GDP.
Read more about this topic: Intermediate Consumption
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