The Use Value of Durable Goods in Well-being Measurement

13th Meeting of the Pacific Statistics Methods Board (PSMB) Canberra, Australia 22-23 May 2024 Guidance note: Use value of Durable goods in Consumption Aggregate Dr. Jean-Paul ZOYEM (SPC consultant Welfare Economist)

Contribution of durable goods to the well-being Monetary Poverty measurement is based on 2 pillars: Consumption aggregate: as the measure of the well-being Poverty line: the Threshold of Well-being under which people are considered as poor Consumption aggregate is calculated as: Total value of the food consumption, and Total Expenditure on Non-food goods and services (clothing, transport, education, health, etc) Special considerations on Expenditure: Imputed rent and Use value of durable goods Durable good : A good that can be used repeatedly or continuously over a period of considerably more than one year and has a substantially higher purchasers price than semi-durable goods and non-durable goods. Examples: motor vehicles, bicycles, boats or major household appliances such as televisions, computers, refrigerators, washing machines, etc.

Features of durable goods Life of a washing machine Lifespan of asset Date of end of use Date of purchase Reference period Date of purchase:Acquisition value Reference period: The asset value at the survey date, The service rendered for one year (Consumption Flow), Lifespan: Total service rendered during the use period Date of end of use: remaining value

Use value of durable goods Challenge Estimate the Consumption Flow as the service rendered by the durable good for one year Main estimation Approaches of estimating the Consumption Flow Acquisition approach Rental equivalence approach User cost approach

Approach of estimating the Consumption Flow Acquisition approach Consumption Flow is assigned as: Acquisition value for households who acquired the asset during the survey year, Over estimation of well-being: acquisition value reflects the service rendered for all the life of the asset in use Zero for households who acquired earlier to the survey year Under estimation of the well-being: the service rendered during the year is not zero Rental equivalence approach Consumption Flow is assigned as the Value at which the good would be rented No rental market for most durable goods, Rental values are rarely collected by household surveys

Approach of estimating the Consumption Flow User cost approach Assign the cost that the household is willing to pay for using the durable good for one year: Opportunity cost: the money used to buy the good would be placed at the bank for interest; The depreciation of the durable good = the decrease in the value of the good User cost in practice Analysts often count the opportunity cost as negligeable; Analysts mostly focus on the depreciation of the durable good CF = Value of the depreciation of the good during the year: ?? = ????where ?? is price of the durable good at the begining of the year period ?? is the annual depreciation rate of the good (due to both physical deterioration and loss of market value) Main challenge is the calculation of the depreciation rate of the durable good (??)

Approaches of Estimation of the depreciation rates Geometric depreciation model Assumption: The depreciation rate is constant over time; 1 ? ??,? ?0,? The depreciation rate can be expressed in the formula is ? = 1 where: Proxi for v = years of ownership of the good Proxi for ??,?= resell value of the good (self-estimated by the respondent) Proxi for ?0,?= acquisition price of the good when it was purchased, adjusted by inflation rate Economic life depreciation model Assumption: At the moment it reaches the end of its life, the durable good still embodies some positive economic value; 1 ? where: The depreciation rate is expressed as ? = 1 ? T is the maximum duration of the economic life of the durable, is the proportion of the value of the durable good that remains at the end of use; Remain value: ??,? = ?0,?

Keys findings from the case study (Tonga and Tuvalu) Calculation of the depreciation rate: 2 methods Economic life depreciation model is Easy to calculate, ButAlpha parameter is arbitrary chosen by the analyst Geometric depreciation model requires more parameters Those parameters can be derived from the survey Sampling issue for the depreciation of durable goods Samples of durable goods Number of durable goods: 46 in Tonga and 49 in Tuvalu Sample sizes in Tonga for geometric model: equal one for 1 good and below 5 for 4 goods Sample sizes in Tuvalu for geometric model: equal one for 4 goods and below 5 for 9 goods Depreciation rates may not be accurate for those durable goods

Keys findings from the case study (Tonga and Tuvalu) Data collection issue Contribution of durable goods to Consumption aggregate: around 5% for Tonga and Tuvalu Contribution of individual durable good to the overall durable goods use value: Tonga: top 10 durable goods (of 46) = 86 % of the total and 20 bottom goods= 1.8 % Tuvalu: top 10 durable goods (of 49) = 82 % of the total and 20 bottom goods= 2,0 % Question: Is there a need to collect all those items as durable goods? Collection of expenditure in HIES Ordinary good: the amount of the purchase for one year Durable good: ownership of the good in the household, number of items, date of acquisition, acquisition price, resell price, etc; May not be relevant to collect durable goods with too few contribution to the total

Use value of durable goods: PSMB recommendations PSMB to provide feedback on the main guidance points of substance: 1. The computation of the use value of durable goods should be based on the User cost approach ; 2. The depreciation rate for durable goods categories should be estimated based on geometric depreciation model when the sample of durable good items is reliable; 3. Aresearch analysis should be conducted on different HIES data to: o Establish a set of depreciation rates serving as benchmark for depreciation rate calculation in the region; o Establish a core list of durable goods for HIES; and o Suggest a reference value of economic residual value for economic life depreciation model. 4. When the depreciation rate cannot be estimated using the geometric method, valid alternatives to be considered are the regional benchmark and the economic life depreciation model; 5. The HIES questionnaire should be reviewed for a better specification of durable goods and collection of all the data needed to estimate the depreciation rate and the use values.

Guidance note: Use value of durable goods in Consumption Aggregate Many Thanks for your attention Address/post: Pacific Community (SPC), 95 Promenade Roger Laroque, BP D5 98848 Noumea, New Caledonia Phone: +687 262000 | Fax: +687 263818 | Email: complaints@spc.int | Web: https://spc.int/accountability