Home Production and China's Hidden Consumption

• Published date: 01 March 2020
• Author: Yabin Wang
• Date: 01 March 2020
• DOI: http://doi.org/10.1111/roiw.12400

© 2018 Internationa l Association for Res earch in Incom e and Wealth

181

HOME PRODUCTION AND CHINA’S HI DDEN CONSUMPT ION

by yabin Wang*

New York University

This paper presents a structural approach to estimating the value of home production in China. The

structural model incorporates stylized facts about the time allocation of Chinese households, such as

the active participation of retired individuals in home production. Estimates based on the China Health

and Nutrition Survey show that the aggregate value of home production as a fraction of adjusted GDP

has fallen at a rate of 2.7 percent per year over the past decade in China. However, a significant part of

China’s private consumption was still satisfied through unpaid home production in 2009, amounting to

roughly 18 percent of adjusted GDP.

JEL Codes: E01, D13, J22

Keywords: Chinese economy, consumption, home production, time use

1. introduction

Standard measures of gross domestic product (GDP) do not account for

home-produced goods and services that are not created for the purpose of generat-

ing market income.1 This downward bias in the measurement of aggregate produc-

tion and consumption is particularly large in poorer countries, where the scope of

formal markets for goods and labor is limited (see, e.g., Budlender, 2010). When

developing economies begin to catch up with more advanced economies, they

undergo changes in a variety of household behaviors, including decisions about

consumption, labor supply, and time allocation (Goldin, 1994; Mammen and

Paxson, 2000).2 Much of the work that used to take place within the household is

2For example, Goldin (1994) studies the relationship of labor-force participation of married

women and economic development and finds that the participation rate initially declines following the

movement of production from the household, family farm, and small business to the wider market, but

the income effect weakens at some point.

Note: I am grateful to Michael Hutchison, Joshua Aizenman, and Carl Walsh for their guidance

and valuable comments, to The Conference Board McGuckin fellowship for financial support, and to

the participants of University of California Santa Cruz Macro Workshop and Economics Department

workshop at The Conference Board for useful comments. I thank Ataman Ozyildirim, Vivian Chen,

Bart van Ark, Louise Keely, one anonymous referee, and the editor for helpful suggestions. All remain-

ing errors are mine.

*Correspondence to: Yabin Wang, New York University Abu Dhabi, Abu Dhabi, United Arab

Emirates. (yabin.wang.econ@gmail.com).

Review of Inc ome and Wealth

Series 66 , Number 1, March 2020

DOI : 10.1111 /roi w.124 00

1The components of GDP are personal consumption expenditures, business investment, govern-

ment spending, and net exports. Calculations of GDP that are based on the System of National

Accounts (SNA) include only the production of goods and services that are performed for the purpose

of generating income; therefore, home produced goods and services (not for sale) are excluded from

SNA.

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Review of Income and Wealth, Series 66, Number 1, March 2020

182

© 2018 Internationa l Association for Res earch in Incom e and Wealth

gradually outsourced into the market and spurs market consumption.3 How this

transition affects the aggregate value of home production remains, however, an

open question. Most of the evidence on this issue comes from historical U.S. data:

for example, Bridgman et al. (2012) show that in the United States (U.S.), the ratio

of home production to nominal GDP has fallen from 39 percent in 1965 to 26 per-

cent in 2010.

In this paper, I provide the first analysis of trends in the value of home pro-

duction from an emerging market, namely China. I use a rich dataset (the China

Health and Nutrition Survey, CHNS) that tracks the labor income, time use, con-

sumption of home durables, and demographics from over 4,000 households across

nine Chinese provinces. Critically, this dataset allows me to document household

decisions over time between 2004 and 2009, a period of record growth in China. I

focus on China for several reasons. First, some recent estimates suggest that home

production is large (see, e.g., Dong and An, 2015). Second, the scope of goods and

labor markets (and thus the opportunity cost of engaging in home production) has

dramatically increased in China. Third, there has been a rapid diffusion of modern

household appliances and other durable goods used in home production, often

aided by public programs (such as the Home Appliances Going to the Countryside

(HAGC) program launched in 2007; see Tewari and Wang, 2016). I document some

of these trends in the first half of the paper, using the U.S. as a benchmark. I show

that Chinese people spend more time in home production compared to Americans

and less at leisure, although a converging trend is exhibited over the years. One

striking feature of home production in China is that retired individuals, especially

elder women, play a very active role, possibly due to their low opportunity cost, or

cultural reasons and social norms.

The main methodological contribution of this paper is to compute the value

of home production and its dynamics using a structural estimation approach.

In this approach, I first estimate the home production function by fitting house-

hold data to a model of time allocation and then use the estimated parameters to

compute the nominal value of total home production. The model I adopt builds

upon the standard home production framework (surveyed in its various applica-

tions in Aguiar et al., 2012). A special feature of my model is that it allows some

members of the household not to participate in the labor market, while exploiting

intra-household relations to estimate their contribution to home production. The

literature has often used simpler methods to estimate the size of the home produc-

tion sector, based on evaluating the factors employed in home production at their

market prices. However, these methods implicitly assume that home production is

linear in the household inputs, thus ignoring decreasing productivity and comple-

mentarities. The resulting bias in the estimation of home production is potentially

important in the context of economic development. Chinese households are expe-

riencing large changes in home production hours and their usage of appliances.

However, the final effect on the value of home production depends on how these

inputs are combined in the home production function.

To estimate the home production function, I fit the model to Chinese house-

hold survey data using non-linear least squares. The empirical results illustrate a

number of interesting points. The effective home production hours of different

3Similar evidence on U.S. history also exists; see, for example, Ramey (2009).