Cost of capital services and the
national accounts
UN STATISTICS DIVISION
Economic Statistics Branch
National Accounts Section
UNSD/ECA National accounts workshop November 2005
1
Current SNA93 treatment and
critique
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Services from assets used in non-market production are
reflected in output only as consumption of fixed capital.
Implies no return to capital used in non-market production
as against the one employed for market production
Zero net operating surplus for non-market producers as
output estimated on cost basis;
Output = IC+COE+COF
Implies inconsistency in capital services rendered by similar
asset used in market and non-market production
Government and non-market producers–cost
of capital of own assets
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Implies different values for similar assets after initial
purchase or different values of consumption of fixed capital
What is the way forward? (AEG decision in 2004)
 Treat similar assets as providing similar services regardless
of the nature of production. Therefore, include capital
services as part of output of non-market producers.
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Consider four types of assets: Assets used by civil servants,
assets benefit the economy at large, assets used by the
community at large and land.
Issues
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When summing costs to make estimates of output for
non-market producers, what should be used to reflect
the cost of using non-financial assets:
 Consumption of fixed capital only, which is the current
recommendation, or the full cost of capital services
(approximately consumption of fixed capital plus a return to
capital)?
 If the full cost of capital is chosen, should it apply to all nonfinancial assets owned by the non-market producer or just
some of them?
Government and non-market producers–
cost of capital of own assets
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In country consultation opinions were divided
Against
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Non-market equals non-profit, so why should the
accounts include “profit” for government?
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Practical difficulties for implementation
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Including a return to capital for assets used in nonmarket production means that GDP and NDP would
increase and what then would happen to the resulting
government operating surplus.
What rate of return for estimating the opportunity cost
of the capital (discount rate)?
Government and non-market producers–
cost of capital of own assets
For
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Measure of non-market output calculated as the sum of
costs, and capital services (user cost times volume of
services) is a better measure of the costs incurred than
is provided by the decline in asset value.
Data requirements are similar for estimating
consumption of fixed capital via a PIM.
Government consumption expenditure would increase
by the same amount.
Govt bond rate may be a good choice for the discount
rate.
First type of asset: first priority
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Assets used by civil servants in course of their
work e.g. computer, vehicle, building
Determining capital service/ return to capital/
consumption of fixed capital straightforward
Second type of asset: 2nd priority
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Assets bringing benefits to the economy at large
e.g. roads and other infrastructure.
May be unique products so valuation may be
more difficult than first type but valuation is
needed for calculation of consumption of fixed
capital.
Third type of asset
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Used by the community at large e.g. recreational
areas such as city parks, monuments
May be difficult to place a value on these
Lower priority to estimate
May be infeasible
Fourth type of asset
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Land
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Produced
Non-produced
As problematic as the third type
AEG decisions
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The AEG reaffirmed the principle to include a
return to capital on non-financial assets used in
non-market production.
It was agreed to follow-up on a one-on-one
basis the comments from the global and
country consultations, including those
comments on the scope, and report back to the
next AEG Meeting in early 2006.
What is capital service?
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In production process, labour, capital and
intermediate inputs are combined to produce
output
Employees/workers may be seen as repository of
labour services
Similarly, capital goods used in the process of
production are seen as carriers of capital services
that constitute the actual input.
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Capital service is the service provided by an asset
used in the process of production.
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When the Capital good “delivers” services to its
owner, no market transaction is recorded.
What is capital service?
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Measurement of this implicit transaction is one of
the challenges of capital measurement for
productivity analysis
Conceptually, capital services reflect a quantity, or
physical concept, not to be confused with the value
or price concept of capital
Service flows of an office building are the protection
against rain, the comfort and the storage services
that the building provides to personnel during a
period
Price of the capital service is measured as the user
costs or rental prices of capital
What is capital service?
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If there were complete market for capital
services, rental prices could be directly observed.
When a fixed asset such as a car is rented,
rental paid is the payment for the capital service
provided by the car. It is observable.
This is not the case for the many capital goods
that are owned for which rental prices have to be
imputed
The implicit rent that capital good owners ‘pay’
themselves gives rise to the terminology user
cost of the capital
What is capital service?
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When a fixed asset is used by its owner, the
1993 SNA record the cost of the capital only
as consumption of fixed capital (CFC).
Capital service = CFC + return on capital
Capital services may be generated by fixed
assets, inventories, land and other nonproduced assets.
Capital services
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Costs of capital services allow for measuring the
contribution of each type of asset to value added
and GOS, and makes it possible to study
productivity.
However, it cannot be introduced into the national
accounts in an isolated manner.
It should be compiled in an integrated and
consistent manner with estimates of CFC and
capital stock and an assumed rate of return.
Integrated system of Capital services,
CS &CFC
Series
of
GFCF
Ageefficiency
Rate of
return
Productive
Cap Stock
User cost
Total
capital
services
Retirement
Age-price
Net CS
Balance
sheets
Depreciation
CFC
Net
domestic
product
AEG decisions
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Confirmed the importance of including the
concept of capital services in the updated SNA
Strongly supported including the estimates of
capital services in supplementary tables rather
than in the core accounts of the SNA
Confirmed that capital services (comprising
depreciation and return to capital) and capital
stock measures should be compiled in an
integrated and consistent manner
AEG decisions
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agreed that the basic concepts of the capital
services approach be presented in the SNA and
that the detailed recommendations would be
elaborated in an updated version of the OECD
manual on “Measuring Capital”
agreed that the concepts underlying the
formulae presented in the paper (“Cost of
capital services”, document number
SNA/M1.05/04; Issue 15) are appropriate,
subject to detailed checking.
AEG decisions
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The group confirmed the importance of
measuring capital services but a large
majority did not favor including “of
which” items in the core accounts.
Instead, there was considerable support
for a chapter/annex on the
measurement of capital in the updated
SNA.
Thank You