Frequently Asked Questions
Guidelines for Citing BEA Information | ID: 67 | Created: Dec-05-2005
Capital gains differ from ordinary income in three important respects. They are less available to fund expenditures, because to spend a capital gain, the asset that has appreciated must first be sold. (A capital gain can sometimes be used indirectly to fund spending if the asset is pledged as collateral for a loan that is based on the value of the collateral.)
Second, ordinary income is generally stable enough to view as a sustainable source of funds to meet expenses, but capital gains are volatile and not always positive. For example, in 2002, capital losses on stocks and mutual funds caused a decline in personal net worth that exceeded 20 percent of disposable personal income. A measure of saving that is stable and dependable is more meaningful for most purposes than one that is subject to wide, unpredictable fluctuations.
Finally, adequate funding for investment is critical for a nation’s future economic prospects, and the NIPA definition of saving is the appropriate one for measuring funds made available to finance new investment. Capital gains represent changes in the price of already-existing assets, but only an expansion of the real stock of assets via investment represents an increase in the wealth of a society. Unlike saving out of ordinary income, capital gains are not a source of funding for needed investment. A nation that does not save, as this concept is defined in the NIPAs, must either do without the investment needed to maintain or improve its standard of living, or it must depend on saving by other nations for the financing of its investment needs.
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