OECD National Accounts Working
Party, 3-5 October 2007
Measuring Capital
Revised Manual
Paul Schreyer, OECD
Background
• OECD Manual Measuring Capital in 2001
• Since then:
– New developments in the area of
measurement of non-financial assets
– Canberra II Group dealt with issues in
conjunction with SNA Revision
• Revised and extended Manual is one of
outputs of Canberra II Group
• Purpose: companion product to revised
SNA93
Background
• Canberra II met last in April 2007
• First draft of present Manual was
presented there
• Present second draft
– reflects comments from April meeting
– is still incomplete (e.g., chapter on inventories
missing, glossary)
– But complete enough to be submitted to
NAWP for general comments
Background
• Lengthy document – comprehensive
presentation here not possible
• Only main points
• Of which there are seven
Structure of Manual
• Three-part structure to cater different audiences
Part I:
– concepts of capital measurement,
– non-technical description, with numerical
examples
– objective: convey the economic and statistical
rationale for the measurement of the flows
and stocks associated with capital
Structure of Manual
Part II:
– Orientated towards precision and empirical
implementation.
– Objective: provide guidance for measurement
– Includes some text for measures above and
beyond those recognised in the SNA, for
example full user cost of capital for
government assets.
– Where discussion goes beyond the SNA, this
is made explicit
Structure of Manual
Part III:
– Algebraic exposition of the measurement
model underlying capital stocks and flows.
– Objective:
precise
propositions
for
implementation routines that are consistent
with the SNA, such as rules of valuation (endyear for stocks, average-year for flows etc.)
Annexes:
– Asset service lives used in countries
– Numerical example with spreadsheet
Scope of the Manual
Fixed assets, inventories
R&D: at margin only  Handbook on intellectual
property rights
Non-produced assets: somewhat non-systematic
treatment
– Land gets special attention, other non-produced
assets such as natural resources do not
– No strong conceptual justification for this choice
except that land has long been treated as a
source of capital services in economics.
– A complete guide to non-financial balance sheets
would not have been feasible within the time
frame of the write-up of the Manual.
1. Main purpose: consistent
framework
• In the past, main purpose of measuring capital was
to provide a basis for the calculation of CFC.
• CFC measurement remains key but two additional
objectives:
– Balance sheets
– Capital services for productivity analysis.
• Main objective of Manual is to present an integrated
and consistent approach towards capital
measurement that encompasses all three objectives
2. Two basic functions of capital:
wealth and production
• Dual nature of capital:
– storage of wealth
– source of capital services in production.
• Different measures for each aspect,
depending on analytical purpose
• Wealth and production side of capital are
not independent of each other  need for
consistent measurement
2. Two basic functions of capital:
wealth and production (cont’d)
• Wealth aspect: age-price relationship
– How does the price of an asset evolve as it
gets older while controlling for the overall
price change of the asset  depreciation rate
• Production aspect: age-efficiency profile
– How does the productive capacity of an asset
evolve as it gets older?  rate of capital
services flow
• For a single asset, these profiles are
different
Capital measures in the 1993 SNA
Age-price
Net value added
function
Net
stock
CFC
Gross
stock
Investment
Retirement
function
Integrated set of capital measures
Age-price
Net value added
function
Net
stock
CFC
Return on capital
User costs
Gross
stock
Investment
Retirement
function
Age-efficiency
function
Productive
stock
Capital services
3. Geometric patterns
• In practice, cohorts of assets are measured, not
single assets.
• Asset groups are never truly homogenous but
combine similar types of assets.
• Cohorts require retirement distributions because
it is implausible that all capital goods of the
same cohort retire at the same moment in time.
• Thus, age-efficiency and age-price profiles for a
single asset have to be combined with
retirement patterns to measure capital stocks
stocks and depreciation.
3. Geometric patterns (cont’d)
• For a cohort of assets, the combined ageefficiency and retirement profile or the combined
age-price and retirement profile resemble a
geometric pattern, i.e., a decline at a constant rate
• While this may appear to be a technical point, it
has major practical advantages for capital
measurement
• The Manual recommends geometric patterns
for depreciation and for wear and tear – they
are simple and empirically justified
• Non-geometric patterns are not wrong but more
complicated to implement in a consistent way
4. Consumption of fixed capital
• CFC or depreciation remains a central variable in
capital measurement
• There is a long history about its exact meaning.
• With increasing importance of capital goods that
undergo rapid technical change, there has been
renewed discussion about the relation between
depreciation and obsolescence
• Should depreciation reflect obsolescence and if
so, what are the implications for measurement?
• The Manual confirms, in line with the SNA, that
CFC should also reflect expected obsolescence.
4. Consumption of fixed capital
(cont’d)
• Some authors have suggested that to do so it is
necessary to incorporate expected real holding losses
into measures of CFC; others have come to a different
conclusion.
• The Manual finds that there is no single ‘correct’ way of
dealing with expected price changes
• Different analytical questions about net income give
rise to different prescriptions about how to measure
depreciation.
• For implementation, the Manual sticks with the
approach towards measuring consumption of fixed
capital that excludes real holding losses from
depreciation. This corresponds to the practice of
statistical offices.
5. Price and volume of capital
services
• Manual explains how prices of capital
services or unit user costs are derived and
measured.
• Three elements of cost of using capital in
production:
– CFC
– Real costs of financing or a required real
return to capital
– Real expected holding gains or losses
5. Price and volume of capital
services (cont’d)
• Several ways of how the return to capital is
measured, including
– ex-post calculations based on observed
measures of property income
– ex-ante calculations based on information
from financial markets.
• For many reasons, results are not identical
but the general evidence appears to be
one of robustness of capital service
measures with regard to the
specifications for the return to capital.
5. Price and volume of capital
services
• Flow of capital services is measured by the
volume change of the productive capital
stock
• Together with the price of capital services,
this offers a way of splitting GOS plus
capital compensation of mixed income into
a price and a volume component
• This means the income side of the
accounts can be split into prices and
volumes
6. Cost of capital for non-market
producers
• Value of output of non-market producers =
costs
• Capital costs are measured as CFC only,
leaving out financing costs.
• Reasons:
– Of practical nature (which interest rate should
be chosen?)
– Conceptual arguments, eg avoid that GDP
rises when interest rates for government debt
increase.
6. Cost of capital for non-market
producers (cont’d)
• But also good conceptual reasons why the
cost of capital should be measured as
completely as possible for non-market
producers. (Note: for OOH, imputation is
already in the national accounts)
• If not in the national accounts, then for
analytical purposes it is interest to impute
financing costs.
• Manual discusses concepts and practical
ways of implementation even if this goes
beyond SNA prescriptions
7. Service lives and depreciation
rates
• Sizable part of the Manual deals with the
measurement of service lives, retirement
functions and patterns of depreciation.
• Generally, good empirical information
on asset lives is sparse and often dated.
• Examples of measurement initiatives in
countries are referenced but possibly
incompletely  further country information
encouraged
Next steps
• Comments are appreciated on:
– General structure of document
– Readability and presentation
– Scope: any important areas left out? Any less
important areas over-emphasised?
– Usefulness from national accounts perspective
• More specific comments either now or in
written form before November 30th
• If basic endorsement by NAWP, 2nd revision
by the beginning of 2008 and transmission
to CSTAT in June 2008