Capitalization of Military Weapons
Systems in the U.S. National Accounts
Brent R. Moulton
Working Party on National Accounts, OECD
Paris
October 25–28, 2011
www.bea.gov
Why SNA 2008 capitalizes weapons
▪ SNA 2008 recognizes that military personnel
are engaged in production and use weapon
systems continuously in the production of
defense services
▪ Weapon systems have value and can be resold
▪ Consistent with international public sector
accounting standards
▪ Service lives and depreciation account for
decline in value over time and the need for
eventual replacement
www.bea.gov
2
Effects of new treatment
▪ SNA 1993 treated purchases of weapons
systems as intermediate consumption
▪ SNA 2008 reclassifies weapons purchases as
gross fixed capital formation (GFCF)
 Lowers final consumption expenditures and raises
GFCF by equal and offsetting amounts
▪ SNA 2008 includes weapons systems in
consumption of fixed capital (CFC)
 Raises final consumption expenditures and GDP
www.bea.gov
3
Effects on U.S. national accounts
▪ GDP level - for 2010:
 Purchases of weapons systems were about
$105 billion (or 0.7 percent of GDP)
 Reclassified from consumption expenditures to
GFCF
 CFC for weapons systems was about $74
billion (or 0.5 percent of GDP)
 Raised general government final consumption
expenditures and GDP
▪ Modest effects on GDP growth rate,
trends
www.bea.gov
4
Perpetual inventory method
▪ CFC and net stocks are calculated using
the perpetual inventory method (PIM)
▪ Method is described by:
 OECD, Measuring Capital: OECD Manual
2009, second edition
 Bureau of Economic Analysis, Fixed Assets
and Consumer Durable Goods in the United
States, 1925–97, (2003), available at
www.bea.gov
www.bea.gov
5
Outline of PIM
▪ Determine age-price/depreciation profile for
each type of asset
 May be geometric or straight-line
▪ Determine retirement profile (straight-line)
▪ Apply profiles to net stock (geometric) or to
time-series of investment (straight-line) at
constant prices
▪ Calculate end-of-period net stock as beginning
stock plus investment less other changes in
assets less depreciation (at constant prices)
▪ Reflate to current prices
www.bea.gov
6
Setting depreciation/service lives
▪ For service lives, BEA staff consulted with staff
from the Department of Defense
▪ Declining balance rates were used to convert
service-life information to depreciation rates
▪ Geometric depreciation profiles are used for all
asset types except missiles, which use straightline
▪ For more information, see Fixed Assets and
Consumer Durable Goods, available at
www.bea.gov
www.bea.gov
7
BEA depreciation rates/service lives
Examples – selected weapons system assets
Asset type
Geometric
depreciation rate
(percent)
Service life (years)
7 to 11
15 to 25
28
6
N.A. (straight line)
20
6 to 7
25 to 30
8
20
Aircraft:
Air frames
Engines
Strategic missiles
Ships
Tanks and armored
personnel carriers
www.bea.gov
8
Other changes in assets
▪ For weapons systems, other changes in assets
may represent war losses or the scrapping of
equipment after a war.
▪ War losses affect the PIM calculation in the
following ways:
 The loss itself is subtracted to derive end-of-period
net stock.
 Depreciation on the loss is computed using a halfyear convention. This “depreciation” is subtracted
from both beginning-of-period net stocks and CFC.
www.bea.gov
9
Implementation in U.S. accounts
▪ Based on advisory expert recommendations,
BEA began capitalizing military weapons
systems in its national accounts in 1996
▪ For international comparability, data
submitted to OECD apply the SNA 1993
treatment
 This is the only NIPA/SNA adjustment that affects
GDP
▪ When BEA implements the other major SNA
2008 changes in 2013, it will no longer need to
make this adjustment
www.bea.gov
10