3050 pdf Lecture 5 with blanks

ECON 3050: Consumer Durables and Warranties Lecture #5 I. Consumer Durable Goods A. In the NIPAs (National Income and Product Accounts), consumer durable goods are defined as tangible commodities that have an average life of 3 or more years. The Bureau of Economic Analysis (BEA) publishes the NIPAs 1. GDP = Gross Domestic Product: market value of all final goods and services produced by labor and property located within a nation's borders; GDP is a measure of annual production for a country. One approach to calculating GDP is the expenditures approach, which entails adding up the spending on final goods and services by all sectors of the economy 2. Spending on Consumer Durables Goods PCE = Personal Consumption Expenditures: value of final goods and services purchased by persons PCE for 2022 = $17,367.2 billion, $2,185.5 billion went to purchase consumer durables 12.6% of PCE in 2022 was spending on consumer durables B. Characteristics common to most (not all) durable goods 1.useful life > 3 years 2. yield a service flow over useful life ; used repeatedly 3. initial purchase price > value of annual service flow 4. tend to be relatively expensive 5. depreciate ; economic value decreases over time 6. requires maintenance and repair (M & R) 1

7. at some point, the cost of maintenance and repair is greater than the value of the item and the durable should be replaced 8. covered by a written warranty 9. covered by homeowners & renters insurance 10. way of displaying wealth or status See the article "Needing the Unnecessary: the Democratization of Luxury" in R&S 11. costly to dispose of in an environmentally responsible way Planned obsolescence: goods are designed to have a short shelf life and become obsolete in function, design, or too expensive to repair and need to be replaced or upgraded "battery gate" apple bonus C. Useful Life of a Durable Useful life is how long the good functions as expected in its intended use. Useful life depends on: a . initial quality quality useful life b. type and frequency of use c. maintenance and care

2. The measurement for useful life depends on the product. Many appliances, such as dishwashers and clothes dryers, are based on use by a typical family of 4 and useful life is expressed in years. For cars, the number of miles driven is the measure of useful life, and for some electronics, such as TVs, useful life may be given as the number of hours the tv is in use. Understanding how long durables, especially appliances with moving parts, should last helps you maintain them for their expected useful life — without unnecessary repairs for items that legitimately should be replaced. Having an idea of when repairs/replacements are likely to occur helps with planning and budgeting for expensive durables. Major Home Appliance Life Expectancy Chart Life Expectancy (Years) Low High Average Trash Compactors 7 12 11 Dryers , Electric 11 18 14 Dryers, Gas 11 16 13 Dishwashers 9 16 12 Garbage Disposals 10 15 13 Freezers 12 20 16 Microwaves 5 10 8 Ranges , Electric 13 20 16 Ranges, Gas 15 23 19 Ranges, Hoods 9 19 14 Refrigerators , Compact 4 12 8 Refrigerators, Standard 10 18 14 Washing Machines 8 16 12 These appliance life expectancy stats appear as reported in the 23rd annual portrait of the U.S. appliance industry. D. Ownership of Consumer Durable Goods and Consumer Electronics Item % of households owning in 1970* % of households owning in 2020* Calculator 0% ?? close to 100% Color TV 42% 96% Microwave oven 1% 90% PC 0%' 90% Washer 62% 85% *data from various sources and estimates only