<p>So, if I correctly understand what I learned in comments, this question is resolved by two things:</p>

<p>1.We add deprecation in order to ignore it, rather than take it into account. It makes sense because incomes are already decreased by amount of deprecation, so in order to "unaccount" deprecation we must add deprecation. And due to us ignoring deprecation it doesn't make any sense to make distinction "deprecation of new assets VS deprecation of old assets", we ignore both of them.</p>

<p>2.Like renting, money lending is an ongoing service. You can keep extra money for some time, but with each year/month the amount of extra money that you're allowed to keep will become less and less.</p>

CC BY-SA 4.0
2019-12-23T12:38:01.710Z
2019-12-23T12:38:01.710Z
KarmaPeasant
<p>As far as I understand, when we calculate GDP we want to estimate wealth produced during given year in given country. But it seems like it will be problematic when using the income approach (the expenditures approach doesn't suffer from this problem. After all, in the vast majority of cases people pay full price for services and goods at one sitting. When they have problem with paying full price they take a loan and then pay full price with money that they got from a creditor).</p>

<p>1.We include income from receiving interest because giving loans is a service. But if lending money is a service, then it can viewed as kind of service what you can spend literally years to pay for.
There will be incomes from some loans that were given in previous years, yet they they will by included in GDP of this year.</p>

<p>2.We include deprecation. It seems to make sense at first. After all, if an asset was produced this year and was completely worn out the same year, then it's still production. By including deprecation we avoid situation when worn out asset is treated like it has never been produced in the first place. BUT, assets that were created in previous year are also included in this calculation. Why would we include cost of deprecation of something that was NOT produced this year?</p>

<p>Or maybe I don't understand something and there are good reasons to make exceptions for interest and deprecation?</p>

<p>P.S. Okay, so we add deprecation in order to ignore it altogether, thus we don't really count deprecation of old assets. But how about income from loans given years ago?</p>

CC BY-SA 4.0
2019-12-23T00:04:40.520Z
GDP is a measurement of flows (production/income/expenditure) not of wealth.  It does not include interest (in effect transfers between individuals) or take account of depreciation (which is why it is *gross*)
Henry
CC BY-SA 4.0
2019-12-23T01:10:18.277Z
@Henry it includes net interest. See for example here: https://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=gross+domestic+product,+income . Or I should better say in some of the formulations of income approach it includes interest as it can be definitely calculated in a way that circumvent this. But in any formulation it is includes at least implicitly as some households derive income from it.
1muflon1
CC BY-SA 4.0
2019-12-23T03:11:59.063Z
@1muflon1 What can you comment about interest? Why do we include interest from a loan made years ago in GDP of given year?
KarmaPeasant
CC BY-SA 4.0
2019-12-23T06:16:27.477Z
@1muflon1 - As you say, "in some of the formulations of income approach". That version has company profits lower because they pay interest and others' incomes higher because they receive the same interest; it also has company profits lower because of depreciation and has to add it back in later. The version I am familiar with is where company profits (or surpluses) are measured rather higher, mainly reflecting their sales (and stockbuilding) less what they pay suppliers and workers, and so no need to account for interest or depreciation
Henry
CC BY-SA 4.0
2019-12-23T11:00:22.110Z
@Henry yes but then it’s not correct to just say income approach does not include interest without qualifying it.
1muflon1
CC BY-SA 4.0
2019-12-23T11:05:33.107Z
@1muflon1 - "Correct" may be a relative concept here: interest payments which add to some components' income are subtracted from other components' income so in a sense net out and overall do not add to GDP (with the caveat that those parts of banks' interest margins which are used to provide services instead of explicit fees or charges do count towards GDP)
Henry
CC BY-SA 4.0
2019-12-23T11:07:47.000Z
@Henry yes that’s why it’s a net interest so basically you can think of that as an intermediation margin which is basically income for lenders
1muflon1
CC BY-SA 4.0
2019-12-23T11:15:05.437Z
@1muflon1 But can you please answer about including incomes from old debts into GDP of current year (assuming that we explicitly add incomes from lending)? How do we justify it?
KarmaPeasant
CC BY-SA 4.0
2019-12-23T11:21:44.180Z
@user161005 you count the net interest at the point of time where it accrued, no matter how old the loan is. If you want to think intuitively you can think of it as an ongoing charge for the borrowed money (you still have the money until u repay). If you rent a house the rent will also enter GDP each year separately.
1muflon1
CC BY-SA 4.0
2019-12-23T11:32:42.037Z
@1muflon1 Yes, it's exactly as I think of process of paying off debt, as paying ongoing charges for the borrowed money. But rent is different, it's a service that is performed continually, as long as you pay the rent. While with debt we just get one time lump of money and then take years to pay it back + interest. We could solve the problem by declaring that money lending is ongoing service like renting, but I don't see how it's ongoing. The charge is ongoing, but the service itself is not.
KarmaPeasant
CC BY-SA 4.0
2019-12-23T11:35:01.997Z
@user161005 well when you rent for 10years you have the house for 10years to do whatever you please with it (within bonds of law and contract). When you borrow money for 10years you get to have and use the money for 10years as you please as well
1muflon1
CC BY-SA 4.0
2019-12-23T11:42:43.167Z
@1muflon1 Ah, I see. Money lending is ongoing service, it just serves you less and less with each year (so charge is basically reclaiming it + reward for patience and risk for waiting so far). It's as if each year my landlord was gradually reducing amount of land that I rent. I would get the service, but less and less as time goes.
KarmaPeasant
<macroeconomics><gdp>
When calculating GDP using the income approach how do we make sure that we count only wealth produced in given year?
KarmaPeasant
# When calculating GDP using the income approach how do we make sure that we count only wealth produced in given year?

(Asked by: username_0 on 2019-12-22)

As far as I understand, when we calculate GDP we want to estimate wealth produced during given year in given country. But it seems like it will be problematic when using the income approach (the expenditures approach doesn't suffer from this problem. After all, in the vast majority of cases people pay full price for services and goods at one sitting. When they have problem with paying full price they take a loan and then pay full price with money that they got from a creditor).

1.We include income from receiving interest because giving loans is a service. But if lending money is a service, then it can viewed as kind of service what you can spend literally years to pay for.
There will be incomes from some loans that were given in previous years, yet they they will by included in GDP of this year.

2.We include deprecation. It seems to make sense at first. After all, if an asset was produced this year and was completely worn out the same year, then it's still production. By including deprecation we avoid situation when worn out asset is treated like it has never been produced in the first place. BUT, assets that were created in previous year are also included in this calculation. Why would we include cost of deprecation of something that was NOT produced this year?

Or maybe I don't understand something and there are good reasons to make exceptions for interest and deprecation?

P.S. Okay, so we add deprecation in order to ignore it altogether, thus we don't really count deprecation of old assets. But how about income from loans given years ago?

**Tags:** macroeconomics, gdp

> **Comments:**
> **username_1**: GDP is a measurement of flows (production/income/expenditure) not of wealth.  It does not include interest (in effect transfers between individuals) or take account of depreciation (which is why it is *gross*)  
> **username_2**: @username_1 it includes net interest. See for example here: https://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=gross+domestic+product,+income . Or I should better say in some of the formulations of income approach it includes interest as it can be definitely calculated in a way that circumvent this. But in any formulation it is includes at least implicitly as some households derive income from it.  
> **username_0**: @username_2 What can you comment about interest? Why do we include interest from a loan made years ago in GDP of given year?  
> **username_1**: @username_2 - As you say, "in some of the formulations of income approach". That version has company profits lower because they pay interest and others' incomes higher because they receive the same interest; it also has company profits lower because of depreciation and has to add it back in later. The version I am familiar with is where company profits (or surpluses) are measured rather higher, mainly reflecting their sales (and stockbuilding) less what they pay suppliers and workers, and so no need to account for interest or depreciation  
> **username_2**: @username_1 yes but then it’s not correct to just say income approach does not include interest without qualifying it.  
> **username_1**: @username_2 - "Correct" may be a relative concept here: interest payments which add to some components' income are subtracted from other components' income so in a sense net out and overall do not add to GDP (with the caveat that those parts of banks' interest margins which are used to provide services instead of explicit fees or charges do count towards GDP)  
> **username_2**: @username_1 yes that’s why it’s a net interest so basically you can think of that as an intermediation margin which is basically income for lenders  
> **username_0**: @username_2 But can you please answer about including incomes from old debts into GDP of current year (assuming that we explicitly add incomes from lending)? How do we justify it?  
> **username_2**: @user161005 you count the net interest at the point of time where it accrued, no matter how old the loan is. If you want to think intuitively you can think of it as an ongoing charge for the borrowed money (you still have the money until u repay). If you rent a house the rent will also enter GDP each year separately.  
> **username_0**: @username_2 Yes, it's exactly as I think of process of paying off debt, as paying ongoing charges for the borrowed money. But rent is different, it's a service that is performed continually, as long as you pay the rent. While with debt we just get one time lump of money and then take years to pay it back + interest. We could solve the problem by declaring that money lending is ongoing service like renting, but I don't see how it's ongoing. The charge is ongoing, but the service itself is not.  
> **username_2**: @user161005 well when you rent for 10years you have the house for 10years to do whatever you please with it (within bonds of law and contract). When you borrow money for 10years you get to have and use the money for 10years as you please as well  
> **username_0**: @username_2 Ah, I see. Money lending is ongoing service, it just serves you less and less with each year (so charge is basically reclaiming it + reward for patience and risk for waiting so far). It's as if each year my landlord was gradually reducing amount of land that I rent. I would get the service, but less and less as time goes.  

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## 1 answers

### Answer by username_0 on 2019-12-23. Score: 0 | Accepted answer

So, if I correctly understand what I learned in comments, this question is resolved by two things:

1.We add deprecation in order to ignore it, rather than take it into account. It makes sense because incomes are already decreased by amount of deprecation, so in order to "unaccount" deprecation we must add deprecation. And due to us ignoring deprecation it doesn't make any sense to make distinction "deprecation of new assets VS deprecation of old assets", we ignore both of them.

2.Like renting, money lending is an ongoing service. You can keep extra money for some time, but with each year/month the amount of extra money that you're allowed to keep will become less and less.


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