National Accounts and Economic Statistics

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1 For Offcal Use STD/NAES(5)7 Organsaon de Coopéraon e de Développemen Economques Organsaon for Economc Co-operaon and Developmen 9-Sep-5 Englsh - Or. Englsh STATISTICS DIRECTORATE STD/NAES(5)7 For Offcal Use Naonal Accouns and Economc Sascs COST OF CAPITAL SERVICES AND THE NATIONAL ACCOUNTS UPDATE OF THE 993 SNA - ISSUE No. 5 ISSUES PAPER FOR THE JULY 5 AEG MEETING Ths paper has been prepared by Paul Schreyer, W. Erwn Dewer and Anne Harrson WORKING PARTY ON NATIONAL STATISTICS To be held on - 4 Ocober 5 Tour Europe - Pars La Défense Begnnng a 9:3 a.m. on he frs day Englsh - Or. Englsh JT966 Documen comple dsponble sur OLIS dans son forma d'orgne Complee documen avalable on OLIS n s orgnal forma

2 STD/NAES(5)7 COST OF CAPITAL SERVICES AND THE NATIONAL ACCOUNTS SNA/M.5/4 UPDATE OF THE 993 SNA - ISSUE No. 5 ISSUES PAPER FOR THE JULY 5 AEG MEETING Paul Schreyer W. Erwn Dewer Anne Harrson EXECUTIVE SUMMARY Background. The opc of capal servces has been dscussed n varous Canberra II Group meengs, ncludng hose of Ocober 3, Aprl 4, Sepember 4 and Aprl 5. I has also been dscussed n meengs n Eurosa, a he OECD naonal accouns meeng and a he AEG meeng n December 4. A s laes meeng n Aprl 5, he Canberra II Group suppored he recommendaons n he paper by Schreyer, Dewer and Harrson (5) wh some mnor modfcaons.. The man messages o emerge from all of he meengs lsed above s clear; few counres a presen have a suffcenly dealed capal sock daabase o presen robus capal servce fgures and even of hose whch do, no all are ye ready o publsh hese daa as par of he man naonal accouns. However, he varous groups have recognzed ha hs s an area of keen neres o analyss and several more counres are n he process of developng capal servce fgures, albe on an expermenal bass. Gven hese crcumsances, he Canberra II Group has come o he vew ha capal servces should be ncluded n he naonal accouns, bu no he core accouns, and ha a comprehensve descrpon of her role and relaonshp wh oher capal measures should be provded. Noneheless, hose counres whch feel ha her esmaes of capal servces are suffcenly robus should feel free o nclude hem n he core accouns. 3. Ths paper ses ou o explan wha capal servces are, how hey relae o oher capal measures and how hey can be esmaed. Very mporanly, explans how capal socks, capal servces and deprecaon should be compled n a fully negraed way o ensure full coherence n he accouns. I also addresses crcsms concernng he valdy of he capal servces approach. Inevably, s a long paper, and excludng he Annex runs o pages. I s proposed ha subsanal pars of he paper be used n he updaed SNA and he revsed OECD manual on Measures of Capal. Issue and recommendaons 3. In a producon process, labour, capal and nermedae npus are combned o produce oupu. Concepually, here are many faces of capal npu ha bear a drec analogy o labour npu. Capal goods are seen as carrers of capal servces ha consue he acual npu n he producon process. For

3 STD/NAES(5)7 purposes of producvy and producon analyss, hen, capal servces consue he approprae measure of capal npu. 4. Consumpon of fxed capal s somemes hough of as reflecng he full benefs or coss of usng fxed asses. Tha hs s a msconcepon can easly be shown by akng he case where fxed asses are no owned by a frm bu rened from anoher un who owns he capal good. The prce he owner charges for he renal comprses deprecaon (consumpon of fxed capal), a reurn reflecng eher fnancng coss or he opporuny cos of holdng capal and here may be an em reflecng changes n he marke prce of he asse (e.g. when an asse s expeced o lose value quckly, hs has o be facored no he renal). 5. If all fxed asses were leased on he marke, renal values would be drecly observable and naonal accounans could urn o hese daa o esmae he cos of capal servces. In pracce, many fxed asses are owned by her users and no renal ransacons can be observed. To esmae he cos of capal servces o owner-users, an mpuaon has o be made ha brngs ogeher he varous elemens of renals as descrbed above. As ofen, mpung unobserved values rases concepual and emprcal ssues and one objecve of he presen documen s o provde gudance on he choce of hese elemens. 6. A presen, he naonal accouns provde no measure of he value, prce or volume of capal servces. There s no explc lnk beween capal sock and value added excep he enry of consumpon of fxed capal o explan he dfference beween gross value added and ne value added. Ye has always been recognsed ha operang surplus s ncome dervng from he use of capal n producon jus as compensaon of employees s ncome dervng from he use of labour. There s ncreasng neres n explorng exacly how dfferen levels and ypes of capal sock nfluence he level of operang surplus. Ths has led o ncreased aenon beng pad o he (prevously) academc neres n capal servces because of s applcaon o producvy sudes. 7. Whereas he nroducon of coss of capal servces no he accouns s of neres n self, hey should also be nernally conssen wh measures of he ne capal sock so ha he volume and prce measures of capal servces, deprecaon and ne ncome aggregaes n he naonal accouns as well as balance shees form a coheren eny. Ths wll also allow researchers and sascal offces o produce conssen ndcaors of mul-facor producvy (see OECD (a)) whch are of sgnfcan analycal neres. 8. There s hus a more general objecve o develop a se of daa ha negraes new measures of capal servces wh more radonal measures of he ne and gross capal sock, deprecaon and ne measures of ncome and producon. These consderaons have led he Canberra II Group o adop he followng recommendaon Recommendaon : capal servces should be nroduced no he naonal accouns, bu no he core accouns (unless a counry feels ha her esmaes are good enough o do so) and he SNA should descrbe he concep of capal servces and her role n conrbung o producon. Ths descrpon should explan he relaonshp beween capal servces and oher capal-relaed daa and encourage sascal offces o creae a conssen and ransparen se of capal-relaed daa ha serves boh he analyss of ncome and wealh and he analyss of producon and producvy. There s no proposal o change he basc srucure of he accouns. 9. If all fxed asses were leased on he marke, renal values would be drecly observable and naonal accounans could urn o hese daa o esmae he cos of capal servces. In pracce, many fxed asses are owned by her users and no renal ransacons can be observed. To esmae he coss of capal servces o owner-users, an mpuaon has o be made ha brngs ogeher he varous elemens of renals. 3

4 STD/NAES(5)7 One objecve of he paper s o provde gudance on he choce of hese elemens. Hence, much of he man body of he paper s devoed o he compuaon and nerpreaon of user coss measures.. Mehodologcal choces have o be made n compung user coss, and one of hem relaes o selecng he rae of reurn, whch consues an mporan elemen of user coss. The basc choce les beween an exogenous rae (such as a specfc neres rae) or an endogenous rae (calculaed usng he observed remuneraon of capal). If he laer s chosen s necessary o esmae ha par of mxed ncome whch s arbuable o capal. Wh an endogenous rae of reurn, esmaes of capal servces are exacly equal o gross operang surplus plus he capal componen of gross mxed ncome.. The Canberra II Group recommends he followng: Recommendaon : The fnal choce beween an endogenous and an exogenous rae of reurn s lef o he mplemenng sascal offce. However, an exogenous, ex-ane measure for he rae of reurn should be assocaed wh an ex-ane measure for deprecaon and prce changes; s preferable ha user coss be formulaed n erms of real raes of reurn,.e., o rea raes of reurn and prce changes jonly as spelled ou n expresson () n paragraph 34 of he man body of he paper; and as a maer of praccal mporance, s recommended ha mxed ncome be spl no capal and labour componens n order o allow he formaon of aggregae measures of he remuneraon of labour and capal.. There s agreemen ha fxed asses are sources of capal servces. Togeher wh he fac ha here s sascal coverage of nvesmen flows no fxed asses, hey wll clearly ener he scope of capal servces measures. There are, however, several oher asses ha may play a role n he provson of capal servces bu: Some enes are a presen no recognsed as asses, such as research and developmen; Some enes are non-produced such as land; Invenores are asses ha are no always ncluded n he scope of asses ha delver capal servces; Emprcally, he measuremen of some asses s very dffcul a good example beng hsorcal monumens. 3. Nowhsandng furher dscussons n he Canberra II Group wh regard o nvenores, he followng recommendaon s made: Recommendaon 3: In prncple, capal servces measures should be comprehensve n he sense ha hey apply o all non-fnancal asses, excep valuables. Ths ncludes denfyng capal servces for nvenores and land. In pracce, however, here are some asses for whch he usefulness of calculang capal servces, for example for hsorcal monumens, s quesonable or a leas a less mmedae prory han for mos fxed asses. 4. The Canberra II Group encourages counres who so wsh, who feel her esmaes are robus enough and he neres n he resuls srong enough, o nclude he esmaes of capal servces as an of whch enry n he sandard naonal accouns ables. One place for hs mgh be he producon accoun bu gven he cenraly of hs accoun and he capal servces lnk o operang surplus, a possbly beer locaon, a leas for curren prce esmaes, would be n he generaon of ncome accoun where operang surplus s shown. However, because elemens of he generaon of ncome accoun are no amenable o 4

5 STD/NAES(5)7 consan prce esmaon s much smpler o presen consan prce esmaes of capal servces n he producon accoun. 5. For oher counres neresed n developng capal servce esmaes, he proposal s o presen he esmaes n a supplemenary able, bu one whch s conssen wh measures of consumpon of fxed capal and ne and gross sock ha appear n he core of he 993 SNA. 6. The presenaon of capal servces, wheher n he man accouns or a supplemenary able, requres ha operang surplus and mxed ncome are presened n gross, no n ne erms. There s also he queson of wheher he measuremen of non-marke oupu ncludes a reurn o capal or smply an esmae of consumpon of fxed capal. If he laer, a full presenaon of capal servces requres ha supplemenary esmaes are also made for he asses used n non-marke producon. Whaever he specfc presenaonal form, wo seps are requred: Frs, he oal value of non-labour ncome needs o be compued by addng up gross operang surplus and he par of mxed ncome ha s no consdered compensaon for labour npu of self-employed persons. Second, when an exogenous rae of reurn s used he resulng measure for non-labour ncome can hen be broken down no he value of capal servces, dfferenaed by ype of asse and a resdual. An exogenous rae should also be used o esmae he reurn o asses used n non-marke producon. Wh an endogenous rae, he value of non-labour ncome exacly maches he value of capal servces. However, f no operang surplus has been esmaed for he asses used n non-marke producon and f he capal sock fgure used ncludes hese asses, he resulng endogenous rae wll be arfcally low. 7. Whn he value of capal servces, he value of deprecaon (consumpon of fxed capal) can be denfed. Fnally, ne operang surplus s obaned by deducng deprecaon from gross operang surplus. Accoun II..: [Supplemenary] Generaon of ncome accoun Curren SNA Uses Resources D. Compensaon of employees B. Value added D. Taxes on producon & mpors D.3 Subsdes B./B.3 Operang surplus/mxed ncome Proposal Uses Resources D. Compensaon of employees B. Value added D. Taxes on producon & mpors D.3 Subsdes B./B.3 Gross operang surplus/gross mxed ncome Gross operang surplus plus he capal componen of gross mxed ncome Of whch: Capal servces from fxed asses used n marke producon -of whch cfc for hese asses Capal servces from fxed asses used n non-marke producon of whch consumpon of fxed capal for hese asses Capal servces from subsol and oher naural asses Capal servces from non-produced land Capal servces from nvenores 5

6 STD/NAES(5)7 Noe o he able: If no reurn o capal has been esmaed for asses used n non-marke producon, hs em wll be exacly equal o consumpon of fxed capal for hose asses. In ha case would be useful o nclude he capal servces for hese ems as a memorandum em. If necessary hs could be esmaed usng he rao of capal servces o consumpon of fxed capal for asses used n marke producon appled o he fgure for consumpon of fxed capal for asses used n non-marke producon. Alernavely, a real rae of reurn specfc o non-marke producers can be appled. Issues for dscusson 8. Do you agree ha capal servces should be nroduced n he naonal accouns? If so, should hey be n he core accouns or supplemenary accouns? 9. Do you agree ha capal servces, deprecaon and capal sock measures should be compled n an negraed and conssen manner, and ha a comprehensve descrpon should be ncluded he SNA?. Do you agree wh he proposed formulae for he esmaon of capal servces and he opons gven for he rae of reurn?. Do you agree ha all non-fnancal asses, excep valuables, produce capal servces and should be ncluded n he scope of capal servces where feasble? 6

7 STD/NAES(5)7 COST OF CAPITAL SERVICES AND THE NATIONAL ACCOUNTS Table of conens COST OF CAPITAL SERVICES AND THE NATIONAL ACCOUNTS Inroducon Capal sock and he naonal accouns Capal as an npu no producon Volumes and prces of capal servces How o esmae capal servces Inerpreng and measurng renal prces or user coss More on he rae of reurn Wha abou consan prces? Scope of capal servces Presenaon of capal servces n he naonal accouns Should capal servces ener he naonal accouns a resumé of he dscusson... ANNEX: COMPUTING A CONSISTENT SET OF MEASURES OF CAPITAL SERVICES, NET CAPITAL STOCK AND CONSUMPTION OF FIXED CAPITAL Termnology Daa requremens Two avenues for mplemenaon Sarng pon: deflang nvesmen... 5 A. FROM AGE-EFFICIENCY TO DEPRECIATION... 7 A.: DETERMINING AGE-EFFICIENCY PARAMETERS... 7 A.: COMPUTING PRODUCTIVE STOCKS BY TYPE OF ASSET... 3 A.3: COMPUTING GROSS CAPITAL STOCKS BY TYPE OF ASSET... 3 A.4: DERIVING AGE-PRICE PROFILES... 3 A.5: DERIVING DEPRECIATION PROFILES A.6: DERIVING MEASURES OF NET CAPITAL STOCKS AND CONSUMPTION OF FIXED CAPITAL A.7: USER COSTS OF CAPITAL A.8: CAPITAL SERVICES AGGREGATION ACROSS ASSETS A.9: BALANCE SHEETS OPTION B: FROM DEPRECIATION TO AGE-EFFICIENCY... 4 B.: Deermnng deprecaon parameers... 4 B.: Dervng measures of consumpon of fxed capal and ne capal socks B.3: Dervng age-effcency profles APPENDIX : COMBINED RETIREMENT AND AGE-EFFICIENCY FUNCTIONS APPENDIX : USER COSTS BASED ON MID-PERIOD PAYMENTS REFERENCES

8 STD/NAES(5)7. Inroducon. A s meengs n Ocober 3 and Aprl 4, he Canberra II Group on Non-fnancal Asses dscussed a paper by Ahmad (4), proposng he nroducon of capal servces measures no he SNA. Whle he Group agreed ha denfyng capal servces was useful from a naonal accouns perspecve, he group also requesed specfc advce as o he calculaon of capal servces. Furhermore, several oher opcs have been ackled by he Canberra II Group whch canno be seen n solaon from he reamen of capal servces. These are he queson of deprecaon and obsolescence, he reamen of he valuaon of asses used n non-marke producon and he capalsaon of R&D. A s meeng n Sepember 4 n London, he Group dscussed a frs verson of he presen documen whose purpose was o presen a mehod of compung capal servces ha s conssen wh oher decsons ha have been/mgh be made by he Group. The frs verson of hs documen lsed he ssues ha needed selng and made several mehodologcal recommendaons whou, however, workng ou every mehodologcal deal. 3. Ths second draf akes accoun of commens made by counres and members of he Group, and some of he recommendaons have been modfed. In parcular, here s no explc recommendaon o gve preference o a mehodology based on exogenous raes of reurn. Furhermore, n response o dscussons a he OECD Naonal Accouns Expers meeng n Ocober 4 and a he AEG meeng n December 4, he recommendaon o make he producon accoun he cenral place where o show measures of capal servces has been replaced by a recommendaon o produce measures of capal servces n a supplemenary accoun, bu leavng open he opon for counres o accompany hs by an enry n he producon accoun. 4. The proposals made n hs paper mply no radcal changes o he presenaon of he accouns or o he general meanng gven o any of s aggregaes, such as ne operang surplus. Ths prudence reflecs he fac ha he developmen and undersandng of sascs n hs area s sll relavely new, and he fac ha he valuaon of conceps, such as capal servces, are, o some exen, dependen on assumpons abou he way he economy works. Generally, he nroducon of capal servces no he naonal accouns does no change he value of he aggregaes as capal servces are shown n saelle accouns or, f counres so wsh, as of whch ems n he producon accoun. Only o he exen ha a conssen framework ha lnks capal servces, capal socks, deprecaon and balance shees leads o modfcaons n he exsng pracce of counres calculaon procedures, may here be an effec on major aggregaes such as GDP or NDP. One specfc em, however, may change GDP and NDP esmaes: he nroducon of cos of capal servces for asses used n non-marke producon. For furher reference, see Harrson (4).. Capal sock and he naonal accouns 5. Capal sock feaures n wo places n he SNA. I s needed o comple he balance shees and s needed o derve an esmae of consumpon of fxed capal. No all counres do comple esmaes of capal sock and some use very crude mehods o approxmae a value of consumpon of fxed capal usng only flow daa. However, here s no queson ha he SNA suggess ha hs s no wha s recommended and here s ncreasng neres n havng beer esmaes of boh capal sock and consumpon of fxed capal. Many of he argumens abou wheher an economy s susanable or no depend on measures of ncome whch mus exclude consumpon of fxed capal. 6. How s capal sock esmaed? Bascally by cumulang GFCF year by year and deducng reremens. Because makes no sense o aggregae expendures underaken n dfferen years whou adjusng for he dfference n prces beween hose years, all capal sock fgures are n consan prces. These prces may be he prces of he curren year, n whch case pas expendures are adjused o he 8

9 STD/NAES(5)7 curren prce level or may be expressed a he prces of a gven year, usually he one whch s he base year for consan prce naonal accouns. 7. Reremens are calculaed by posulang a lfe lengh and deprecaon s calculaed by supermposng a paern of declne n value over hs me. Ths s called an age-prce profle (see Fgure ). The relevan facor for each cohor of asses s appled so ha he aggregae sock fgure reflecs boh he chosen prce level and also he fac ha smlar asses of dfferen ages have dfferen values. A furher complcaon s ha apparenly smlar asses of dfferen ages ofen ncorporae mprovemens as compared wh earler models. Thus adjusng for prces has o ncorporae adjusng for qualy change also. 8. Once ne capal sock fgures on a conssen bass exs for wo successve years, s possble o calculae he dfference Fgure beween : Capal hem socks and afer and deducng consumpon new of nvesmen fxed capal and n allowng he SNA for dsposals, hs s wha appears as he esmae of consumpon of fxed capal as currenly recommended n he SNA. Tme seres of GFCF by ype of asse all expressed a same md-year prces Reremen profle Age-prce or deprecaon profle Ne capal sock Balance shees Consumpon of fxed capal Ne domesc produc 3. Capal as an npu no producon 9. A presen, here s no explc lnk beween capal sock and value added excep he enry of consumpon of fxed capal o explan he dfference beween gross value added and ne value added. Ye has always been recognsed ha operang surplus s ncome dervng from he use of capal n producon jus as compensaon of employees s ncome dervng from he use of labour. There s ncreasng neres n explorng exacly how dfferen levels and ypes of capal sock nfluence he level of operang surplus. Ths has led o ncreased aenon beng pad o he (prevously) academc neres n capal servces because of s applcaon o producvy sudes. The am of hs paper s o show ha he capal servce approach can be negraed wh he curren SNA pracce of deermnng consumpon of 9

10 STD/NAES(5)7 fxed capal n a way whch does no dsrup he presen sysem bu whch allows for deeper analyss and possble mprovemens n he underlyng daa on capal sock. 3. Whereas he nroducon of coss of capal servces no he accouns s of neres n self, hey should also be nernally conssen wh measures of he ne capal sock so ha he volume and prce measures of capal servces, deprecaon and ne ncome aggregaes n he naonal accouns as well as balance shees are fully negraed. Ths wll also allow researchers and sascal offces o produce conssen ndcaors of mul-facor producvy (see OECD (A)) whch are of sgnfcan analycal neres. 3. An mporan saemen of hs neres n seng up negraed sysem of accouns, capal measures and producvy has recenly been for formulaed for he Uned Saes. Jorgenson and Landefeld (4) oulned a Blueprn for Expanded and Inegraed U.S. Accouns where hey sae as her frs and foremos objecve o make he NIPAs conssen wh he accouns for producvy compled by he Bureau of Labor Sascs and he flow of funds accouns consruced by he Federal Reserve Board. The boundares of producon, ncome and expendures, accumulaon and wealh accouns mus be dencal hroughou he sysem n order o acheve conssency. Smlar saemens may well be rue for oher counres and have been made n he leraure for many years. 3. The value of capal sock recorded n he SNA balance shees reflecs wo facors whch cause he value of he asse o declne over me. One of hese s ha he effcency of mos asses declnes over me. The second s ha que apar from a fall n prce because of an effcency declne, here s a fall n prce because he useful lfe of he asse becomes shorer as me passes. For example a lgh bulb works a he same effcency unl ceases o work a all bu one would no pay he same prce for an old, bu sll funconng lgh bulb as for a new one because would no be expeced o go on workng for as long as he new one. Ths value of he capal sock s usually referred o as wealh capal sock, somemes ne capal sock. The value s bul up by aggregang he value of all asses sll n use valued a a common pon n me. The sequence of parameers whch s appled o each asse o derve s value a any pon n me s called an age-prce profle. 33. If we wsh o examne he conrbuon of an asse o producon, we are only concerned wh he effcency declne and no wh he effec of agng per se. In order o do hs we buld a fgure for wha s called producve capal sock by applyng a parameer o each asse whch reflecs only he declne n effcency. These parameers are descrbed as age-effcency profles. 34. I s possble o relae age-prce profles and age-effcency profles o each oher (see annex). Thus he wo measures of capal sock we have dscussed are dfferen bu enrely conssen, one reflecng boh he declne n effcency and he effec of ageng (he wealh capal sock) and he oher reflecng he declne n value due only o a declne n effcency (he producve capal sock). For example, he fac ha assumpons abou deprecaon raes, he paern of user coss by age of asse or he paern of asse prces by age of asses canno be made ndependenly of each oher was frs realsed by Jorgenson and Grlches (967; 57) (97; 8-87). The algebra for swchng from one mehod of represenng capal npus by age o anoher was frs developed by Chrsensen and Jorgenson (969; 3-35) (973) for he geomercally declnng deprecaon model. The general framework for an nernally conssen reamen of capal servces and capal socks n a se of vnage accouns was se ou by Jorgenson (989) and Hulen (99; 7-9) (996; 5-6). Dewer and Lawrence () furher generalzed he work of hese auhors by relaxng he assumpon ha asses of dfferen ages were perfecly subsuable;.e., Dewer and Lawrence worked ou user coss for each asse by age and hen appled normal superlave ndex number heory o aggregae asses of he same ype over ages. The need for conssency of compuaon mehods for capal socks, capal servces and deprecaon has also been clearly saed n OECD (a,b).

11 STD/NAES(5)7 Fgure : An negraed sysem of capal servces, capal socks and consumpon of fxed capal Tme seres of GFCF by ype of asse all expressed a same md-year prces GOS, Value-added, rae of reurn Ageeffcency profle Producve capal sock/capal servces by asse User coss of capal Toal capal servces Reremen profle Age-prce profle Ne capal sock Balance shees Deprecaon profle Consumpon of fxed capal Ne domesc produc 35. Fgure provdes an overvew of such an negraed framework. Sarng from a se of nvesmen daa and consan-qualy prce ndces, o whch varous parameers are appled, he negraed framework provdes he followng measures: A se of deprecaon parameers, appled o a me seres of pas nvesmens (conssenly valued) yelds a measure for he consumpon of fxed capal; Consumpon of fxed capal deduced from gross measures yelds measures of ne domesc produc, and ne value-added; A se of age-prce parameers, appled o a me seres of pas nvesmens (conssenly valued) yelds a measure for he ne capal sock; A se of age-effcency parameers appled o a me seres of pas nvesmens (conssenly valued) yelds a measure for he producve sock for each ype of asse; User cos weghs appled o rae of change of producve socks yelds a measure for he rae of change of capal servces. 36. A sep-by-sep dscusson of he mechancs of mplemenng he negraed sysem s provded n he Annex o hs documen. 37. I s worh nong ha all bu he las wo measures fgure n he presen 993 SNA and are rounely compued by many counres. The shaded area shows hose compuaons ha are presenly ncluded n he naonal accouns. 38. Noneheless, a rue negraon of capal servces, socks and deprecaon measures also provdes he opporuny o revs or examne several addonal ssues. They nclude:

12 STD/NAES(5)7 he separaon of mxed ncome of unncorporaed enerprses no he conrbuons from labour and capal (see above) he measuremen of he conrbuon of land o producon (see below) he reamen of owner-occuped housng f an agency decdes o mplemen user cos and capal servces measures, he reamen of owner-occuped housng n he naonal accouns should be conssen wh hs user cos mehodology and hs may enal a change n he measuremen of he mpued ren of owner-occuped housng he reamen of asses used n non-marke producon he conrbuon of naural resources o producon he reamen of coss of ownershp ransfer and coss of dsposal of asses. Recommendaon : capal servces should be nroduced no he naonal accouns, bu no he core accouns (unless a counry feels ha her esmaes are good enough o do so) and he SNA should descrbe he concep of capal servces and her role n conrbung o producon. Ths descrpon should explan he relaonshp beween capal servces and oher capal-relaed daa and encourage sascal offces o creae a conssen and ransparen se of capal-relaed daa ha serves boh he analyss of ncome and wealh and he analyss of producon and producvy. There s no proposal o change he basc srucure of he accouns. 4. Volumes and prces of capal servces 39. Capal servces canno be observed drecly, so hey mus be esmaed n much he same way as consumpon of fxed capal s esmaed raher han beng observed. The basc assumpon s ha capal servces are proporonal o he level of producve capal sock and so facors are needed o apply o he sock levels n order o derve esmaes of capal servces. 4. The renal prce or user cos (u )s he prce per un of capal servce. I represens he cos o he owner of of yng up one un of capal sock for use n producon raher han seekng anoher form of reurn from. Because s common o assume ha he flow of capal servces s a fxed proporon of he sock of asses, he oal value of capal servces for a parcular ype of asse s obaned by mulplyng he user cos erm for a new asse by he producve sock of an asse of parcular ype. The producve sock ( K ) s bul up from pas nvesmen flows by applyng he age-effcency profles whch show for each perod of me wha proporon of he orgnal effcency of he asse when new remans avalable. (see also annex). Thus, he value (cos) of capal servces of a parcular ype s: Cos of capal servces = u K 4. Only bref menon s made here of aggregaon across capal goods of dfferen age. For a dscusson of aggregaon ssues n hs conex, see Dewer (), Dewer and Lawrence (), Hulen (99). 5. How o esmae capal servces 4. In a producon process, labour, capal and nermedae npus are combned o produce oupu. Concepually, here are many faces of capal npu ha bear a drec analogy o labour npu. Capal goods are seen as carrers of capal servces ha consue he acual npu n he producon process. For purposes of producvy and producon analyss, hen, capal servces consue he approprae measure

13 STD/NAES(5)7 of capal npu. A presen, however, he naonal accouns provde no measure of he value, prce or volume of capal servces. 43. Consumpon of fxed capal s somemes assumed o reflec he full benefs or coss of usng fxed asses. Tha hs s a msconcepon can easly be shown by consderng he case where fxed asses are no owned by a frm bu rened from anoher un who owns he capal good. The prce he owner charges for he renal comprses deprecaon (consumpon of fxed capal), a reurn reflecng eher fnancng coss or he opporuny cos of holdng capal and here may be an em reflecng changes n he marke prce of he asse (e.g., when an asse s expeced o loose value quckly, hs has o be facored no he renal). 44. If all fxed asses were leased on he marke, renal values would be drecly observable and naonal accounans could urn o hs daa o esmae he cos of capal servces. In pracce, many fxed asses are owned by her users and no renal ransacons can be observed. To esmae he coss of capal servces o owner-users, an mpuaon has o be made ha brngs ogeher he varous elemens of renals as descrbed above. As ofen, mpung unobserved values rases concepual and emprcal ssues and one objecve of he presen documen s o provde gudance on he choce of hese elemens. 45. The dea ha he producon accoun does no explcly denfy he oal values of capal servces from fxed asses bu nsead records hem whn value-added or operang surplus s no, of course, new. The mpeus o separaely denfy hese capal servces now however, largely reflecs he ncreased neres n growh accounng and producvy analyss (OECD (), Fraumen e al (3), Jorgenson and Landefeld (4)). 5.. Inerpreng and measurng renal prces or user coss 46. When renals and he cos of capal servces canno be observed drecly, he varous componens have o be added up o approxmae he cos of capal servces. A smple mehod for dervng a formula for he cos of usng an asse durng perod s he followng argumen. Suppose a producer purchases a new asse a he begnnng of perod a a cos of P, where he subscrp means ha he asse s perods old a he me of purchase (he argumens can readly be exended o he acual or mplc purchase of used asses). A he end of perod, wh normal usage of he asse, he producer ancpaes ha he asse wll be worh P +. The subscrp ndcaes ha he asse wll be perod old and he superscrp ndcaes ha he asse valuaon s made a he end of perod or equvalenly, a he begnnng of perod +. We have used alcs o denoe hs used asse prce because s an ancpaed prce ha may or may no urn ou o be correc. A frs glance, would appear ha he cos of buyng he asse a he begnnng of perod, usng for perod n a normal way, and hen sellng a he end of perod for s ancpaed value s smply P P +. However, hs formulaon of he user cos of capal neglecs he fac ha funds receved a an earler me are more valuable han funds receved a a laer dae. In order o make he currency un receved a he end of he perod, P +, equvalen o he currency un pad ou a he begnnng of he perod, P,, s necessary o eher mulply P by + r or dvde P + by + r where r s he nomnal cos of fnancal capal ha he producer faces a he begnnng of perod. We wll dvde P + by + r n order o oban he followng formula for he begnnng of perod user cos of capal: () u P P + /( + r ). 47. We have formed he user cos from he perspecve of prces ha preval a he begnnng of perod because we beleve ha hs s how renal and leasng markes work: owners of asses who lease For a fuller dscusson see Trple (996). 3

14 STD/NAES(5)7 hem o oher users mus se her renal prces for he accounng perod based on nformaon and expecaons ha preval a he begnnng of he leasng perod. However, he reader should be able o rework our argumens usng end of perod user coss 3 of he form P (+r ) P Alhough formula () s very smple, s no very nsrucve. In parcular, how exacly does he producer form expecaons abou wha he asse wll be worh a he end of he perod? We wll now brng deprecaon and ancpaed asse prce nflaon no he model. The ancpaed prce of a used asse a he end of perod, P +, wll be relaed o he ancpaed prce of a brand new asse a he end of perod of he same qualy as he nally purchased asse, P +, by he followng equaon: () P + = ( δ ) P + where δ s he ancpaed one perod deprecaon rae for a new asse a he sar of perod +. 4 The ancpaed prce of a new asse a he sar of perod +, P +, s also used n he nex defnon, whch defnes he expeced nomnal perod asse prce nflaon rae, : (3) + P + / P. 49. Now subsue () and (3) no () and we oban he followng expresson for he user cos of capal: 5 (4) u P ( δ )( + ) P /( + r ) = (+r ) [(+r ) ( δ )( + )] P (5) = (+r ) [r + δ ( + )] P. 5. Thus he perod user cos of capal s equal o (+r ) (whch wll usually be close o one) mes he begnnng of perod asse prce P mes a number of elemen comprsed n he erm n brackes: he nomnal begnnng of perod rae of reurn or opporuny cos of capal r less he ancpaed (nomnal) asse nflaon rae (so ha r can be loosely nerpreed as an asse specfc ancpaed real rae of neres); plus he asse nflaon rae adjused ancpaed deprecaon rae 6 δ ( + ). 5. Assumng ha a consan qualy asse prce ndex s avalable so ha P does no presen problems n erms of mplemenaon, can be seen ha n order o form he user cos defned by (5), s necessary o oban nformaon on he relevan nomnal rae of reurn r, on he ancpaed nomnal asse nflaon rae and on he ancpaed deprecaon rae δ Ths s done explcly n Dewer () (4) and n he annex o he presen paper. To use Hll s () ermnology, hs s a cross seconal deprecaon rae. Ths mehod for dervng he user cos of capal (5) s essenally due o Dewer (974; 54), excep ha our presen formulaon makes he role of expecaons clearer. Chrsensen and Jorgenson (969; 3) derve [r + δ ( + )] P as he user cos of capal n a connuous me opmzaon model wh geomerc deprecaon. Alernave user cos formulae were derved by Chrsensen and Jorgenson (973), Jorgenson (989; ), Hulen (99; 8) and Dewer and Lawrence (; 76). 4

15 STD/NAES(5)7 5. However, formula (5) s no our fnal recommended user cos formula. Insead of workng wh nomnal neres raes and nflaon raes, s more praccal o work wh real raes. Afer makng some prelmnary defnons, we show how smplfed user cos formulae can be obaned. 53. Le he consumer prce ndex for he economy a he begnnng of perod be c and le he ancpaed end of perod consumer prce ndex be c +. Then he ancpaed general consumer nflaon rae for perod s ρ defned by he followng equaon: (6) + ρ c + /c. 54. The ancpaed general nflaon rae for perod (ρ ) along wh he begnnng of perod nomnal neres rae (r ) can be used o defne he perod (ancpaed) real neres rae r * and he perod ancpaed real asse nflaon rae * as follows: 7 (7) + r * ( + r )/( + ρ ); (8) + * ( + )/( + ρ ). 55. Now subsue (7) and (8) no he user cos formula (4). We fnd ha he resulng formula smplfes o he followng one: (9) u P ( δ )( + * ) P /( + r * ) () = (+r * ) [r * * + δ ( + * )] P. 56. The formula () has he same general form as our earler formula (5) bu expeced real raes have replaced expeced nomnal raes The user cos formula () s one of our wo preferred formulae. We prefer over he equvalen formula (5) because real raes are much more sable han nomnal raes (parcularly n hgh nflaon counres). Thus, wll be easer o approxmae he ancpaed real raes n () han he nomnal raes n (5). Also, real ancpaed holdng gans (or losses) n an asse are lkely o be much smaller n magnude han nomnal expeced holdng gans. 58. A reasonable approxmaon o () n many crcumsances can be obaned by seng he ancpaed real holdng gans erm * n () equal o zero. Tha s, he ancpaed rse n he prce of he asse s assumed o be exacly he same as he ancpaed rse n he general prce level. If hs s done, he resulng user cos formula smplfes o: () u = (+r * ) [r * + δ ] P. 59. Thus hs smplfed no real holdng gans user cos depends only on he perod ancpaed real neres rae r *, he ancpaed cross seconal deprecaon rae δ, and he begnnng of perod asse purchase prce. The user cos formula () s our second preferred user cos formula. Is man advanage over our oher preferred formula () s ha s no necessary o esmae ancpaed real holdng gans and hus formula () s more reproducble han formula (), snce dfferen nvesgaors wll have dfferen echnques for formng expeced or ancpaed holdng gans. A he same me, f relave asse 7 8 These defnons dae back o Fsher (896). Ths user cos formula s broadly conssen wh he approach advocaed n Hll and Hll (3). 5

16 STD/NAES(5)7 prces show marked rends, he use of () may nroduce a bas no he weghng srucure of dfferen asses capal servces flows (see annex). 6. Snce he real neres rae r * wll usually be small n magnude, a reasonable approxmaon o () s: () u = [r * + δ ] P. 6. Ths user cos formula, due essenally o Walras (954; pp68-69), says ha he user cos of capal s equal o he ancpaed real neres rae plus he ancpaed deprecaon rae mes he begnnng of he perod sock prce of he asse. 6. An mporan fac o noce s ha he user cos formulae () and () nvolve expeced real neres raes and no nomnal neres raes. The use of nomnal raes n () and () n place of real raes could lead o remendously naccurae user coss n hgh nflaon counres or n perods of hgh nflaon. 5.. More on he rae of reurn 63. Does he esmae of capal servces explan gross operang surplus and he capal par of gross mxed ncome exacly? Or s he esmae of capal servce ndependen so ha here s anoher elemen of value-added no explaned by remuneraon of labour and capal? Answers o hese quesons deermne he choce of he rae of reurn. The ssue was frs rased by Dewer 9 (98) and hen more exensvely examned by Harper, Bernd and Wood (989). There are wo broad opons: Use of an endogenous (nernal) rae of reurn (esmaed capal servces exacly corresponds o gross operang surplus and he capal elemen of gross mxed ncome) Use of an exogenous (exernal) rae of reurn (esmaed capal servces s unlkely o be exacly equal o gross operang surplus and he capal elemen of gross mxed ncome) 64. The endogenous opon s frequenly used n emprcal research. I assumes ha gross operang surplus plus he capal componen of mxed ncome exacly exhauss he coss of capal servces. Gven he value for coss of capal servces, for he capal sock and deprecaon, here s only one unknown varable, he rae of reurn and he equaon can be solved o yeld an endogenous measure of he rae of reurn. 65. Ths procedure brngs wh several advanages: from a heorecal perspecve, s conssen wh a fully compeve economy and producon processes under consan reurns o scale. From a praccal vewpon, compuaon s sraghforward, and resuls can be of analycal neres n hemselves. For example, would be neresng o compare nernal raes of reurn beween ndusres or beween counres. Fnally, he fac ha he coss of capal servces exacly exhaus gross operang surplus plus he capal componen of mxed ncome avods nerpreng any dfference erm beween he value of capal servces and gross operang surplus ha may show up oherwse. A he same me, he choce of an endogenous rae rases a leas wo oher quesons. 9. Whch r should be used? If he frm s a ne borrower, hen r should be he margnal cos of borrowng an addonal dollar for one perod, whle f he frm s a ne lender, hen r should be he one perod neres rae receves on s las loan. In pracce, r s aken o be eher (a) an exogenous bond rae ha may or may no apply o he frm under consderaon, or (b) an nernal rae of reurn. I end o use he frs alernave, whle Woodland and Jorgenson and hs co-workers use he second. As usual, neher alernave appears o be correc from a heorecal a pror pon of vew, so, agan, reasonable analyss could dffer on whch r o use n order o consruc a capal aggregae. Dewer (98; ). 6

17 STD/NAES(5)7 66. Frs, he economc assumpons ha are needed o jusfy he use of an nernal rae are srngen and s no obvous ha hey hold emprcally. 67. Second, he endogenous mehod canno be appled for hose nsuonal uns for whch he naonal accouns do no generae an ndependen measure of gross operang surplus, noably non-marke producers. 68. We now urn o he opon of selecng an exogenous rae of reurn. Is key advanages are () ha does no rely on as resrcve a se of assumpon as he endogenous mehod. Schreyer (4) has shown ha exogenous raes are compable wh occurrences of non-observed asses, mperfec compeon and non-consan reurns o scale; () ha can deal wh governmen uns for whch here s no esmaon of gross operang surplus; () ha avods mporng errors from oupu daa. Bu here are some addonal advanages. 69. The frs addonal advanage s ha he exogenous mehod perms modellng he rae as an expeced or requred rae. If he axes on profs are alered, for example, hs has mplcaons for wha rae of reurn would be requred afer he change as compared wh he rae requred before he change. The second addonal advanage of an exogenous rae s ha may provde a means of splng mxed ncome beween ncome o labour and ncome o capal. In prncple, f here are ndependen esmaes for he cos of capal servces of hose nsuonal uns whose ncome s mxed, s possble o sor ou he share of labour and capal remuneraon. Such nformaon could be compared agans plausble esmaes of he labour ncome of self-employed. Obanng he emprcal nformaon on capal socks and capal servces by nsuonal un may be dffcul bu a leas here s a possbly of advancng on he analyss of mxed ncome. 7. However, here are also several dsadvanages o he exogenous model. Frs, and foremos, a choce has o be made as o exacly whch rae should be chosen opons are manfold wh poenally mporan mpacs on resuls. There s also a queson wheher he rae should be allowed o vary beween ndusres or secors, and f so, o whch sascal source he naonal accounan should urn for hs purpose. 7. Second, here may be occurrences of economcally meanngless negave user cos. Equaon shows ha a negave user cos wll resul f he expeced nomnal cos of fnancal capal s lower han he expeced nomnal nflaon rae. Bu f hese expecaons maeralsed, here would be a queson of why he asse owner would connue o hold ono snce here would be no economcal raonale for dong so., As explaned by Harper, Bernd and Wood (989) negave renal prces end o occur when ex-ane The se of asses has o be complee n he sense ha all asses are observed by he sascan who comples he naonal accouns. Ths s far from obvous. The naonal accouns provde no ndcaon as o exacly whch facor of producon s remuneraed hrough gross operang surplus. Fxed asses are ceranly among hem bu hey are no necessarly he only ones. The busness leraure offers a wealh of dscussons abou he mporance of nangble asses, and here are good reasons o argue ha such asses accoun a leas for par of gross operang surplus. If an endogenous rae s compued on he bass of hose fxed asses ha are measured n he accouns, bu f here are oher, unmeasured asses ha provde capal servces, he resulng rae s lable o bas. Perfec foresgh has o preval so ha he ex-pos rae of reurn on each asse (mplcly observed by he naonal accounan as par of GOS) equals s ex-ane rae reurn, he economcally relevan par n he user coss of capal servces. There has o be absence of resdual profs (or losses) ha may arse n he presence of marke power, under non-consan reurns o scale or wh publcly avalable capal asses. There s hus no assumpon of perfec foresgh and hs helps o deal wh he queson of expecaons: he level of capal servces s wha he enrepreneur expecs when makng decsons abou he use of asses n producon. If he coss of capal servces urn ou o be less han gross operang surplus, he enrepreneur has made some pure prof or some of he gross operang surplus perans o non-measured asses. Furher, when he exogenous rae s an expeced rae, reflecs he condons (n parcular he mplc renal prces) ha producers are facng when decdng abou producon and nvesmen. Also, from a purely praccal perspecve, f here are mplausbly large dfferences beween he esmaed cos of capal servces and gross operang surplus or f he laer s perssenly lower han he former, hs may be an ndcaon of daa problems n he accouns and provde useful nsghs o sascans. For example, Dewer and Lawrence, n a recen paper, used ndusry-level daa for Ausrala and found a number of mplausble resuls for ndusry-level endogenous raes of reurn. Ths may reflec daa ssues raher han economc realy. 7

18 STD/NAES(5)7 exogenous raes of reurn are combned wh ex-pos raes of asse prce change. I s hus mporan ha he dfferen componens of he user cos erm be reaed conssenly eher as ex-ane or as ex-pos varables. 7. Overall, hus, would appear ha alhough n he auhors vew here are many advanages of usng an exogenous, expeced rae of reurn, a good case can also be made for usng an endogenous, expos rae of reurn and hs leads o Recommendaon : The fnal choce beween an endogenous and an exogenous rae of reurn s lef o he mplemenng sascal offce. However, an exogenous, ex-ane measure for he rae of reurn should be assocaed wh an ex-ane measure for deprecaon and prce changes; s preferable ha user coss be formulaed n erms of real raes of reurn,.e., o rea raes of reurn and prce changes jonly as spelled ou n expresson () n paragraph 34 of he man body of he paper; and as a maer of praccal mporance, s recommended ha mxed ncome be spl no capal and labour componens n order o allow he formaon of aggregae measures of he remuneraon of labour and capal. 6. Wha abou consan prces? 73. One advanage of dervng an explc esmae for par or all of gross operang surplus s he opporuny o derve a machng consan prce esmae. Even hough some more dealed quesons abou aggregaon across quanes of pas nvesmens may arse n he process of compuaon, he spl of he value of capal servces no a prce and a volume componen does no pose specfc dffcules. By s very naure, user coss per un of capal are he prce measure of capal servces. 74. To llusrae wh a smple example, ake he case where he sock of a parcular ype of asse s compued wh he perpeual nvenory mehod. As already descrbes, he relevan capal sock s he producve sock (see OECD (A), Hulen (99)) made up of pas nvesmens ha are weghed wh an age-effcency profle of asses of dfferen age : If we denoe he new nvesmen n any year as I hen, as long as each year s nvesmen s expressed a he same consan prces, hen he value of he producve capal sock, K can be wren as: (4) K = I + h I + h I h I T T 75. Implc n he above lnear formulaon s ha nvesmens of dfferen age are perfecly subsuable 3 once her relave effcency has been scaled by he facor h s. K s hen expressed n uns of he mos recenly acqured nvesmen good and he value of capal servces a curren prces of perod s gven by mulplyng K by he user cos of a new asse: (5) Cos of capal servces n perod a perod prces = u K To keep hngs smple, we gnore a reremen dsrbuon. 3 For a more general aggregaon mehod across nvesmen goods of dfferen age see Dewer and Lawrence (). 8

19 STD/NAES(5)7 76. I s now sragh forward o express he cos of capal servces a consan prces of a base year, f hs s he ndex number procedure appled n he naonal accouns. For example, he value of capal servces n year a prces of he base year can be compued as: (6) Cos of capal servces n perod a perod prces =. u K 77. Volume ndces of capal servces he relevan measure for capal npu n producvy calculaons are easly esablshed by aggregang across dfferen ypes of asses. Agan, he specfc ndex number formula applcable n hs case depends on he ndex number formula used elsewhere n he accouns and on he analycal purpose For mplemenaon by naonal sascal offces, several addonal ssues have o be consdered, n parcular valuaon of flows a average prces of a perod hs concerns he value of capal servces and valuaon of socks n he balance shees a prces a he begnnng and a he end of he perod. How hese valuaon mehods hang ogeher n appled work, s spelled ou n greaer deal n he Annex o hs documen. 7. Scope of capal servces 79. There s no dsagreemen ha fxed asses are sources of capal servces. Togeher wh he fac ha here s sascal coverage of nvesmen flows no fxed asses, hey wll clearly ener he scope of capal servces measures. There are, however, several oher asses ha may play a role n he provson of capal servces bu: Some enes are a presen no recognsed as asses, such as research and developmen. Alhough he Canberra Group s n favour of he possbly o consder R&D expendure as nvesmen, a number of ssues need resolvng before he sock of R&D can be fully negraed no he accouns (see dscusson papers on R&D n he Canberra Group, such as Pzer (4)). Some enes are non-produced such as land. These gve rse o ncome n he form of operang surplus bu n he accoun of he user of he asse, no of he owner (unless he owner s also he user). Ths s dfferen from he reamen of produced asses whch always provde ncome o he owner regardless of whch un s he user of he asse. The SNA does no regard placng of non-produced asses a he dsposal of a producer as producon n self bu an acon gvng rse o propery ncome. The Canberra II Group recommended and he AEG agreed o spl land no wo caegores, produced land (.e. land mprovemen) and non-produced land. Ths has mplcaons for he measuremen of capal servces because, for land mprovemen, capal servces and consumpon of fxed capal wll be shown n he accouns. However, when land s rened from anoher un, or when oher ypes of naural asses are used n producon by uns oher han her owners, gross operang surplus or gross mxed ncome of he user has o be suffcen o allow he user o pay a reurn o hs asse o he owner n he form of ren Invenores are asses ha are no always ncluded n he scope of asses ha delver capal servces alhough sascal agences such as he Ausralan Bureau of Sascs and Sascs Canada have ncorporaed nvenores n her se of producve socks. One ssue ha has been rased s wheher unwaned nvenores should be consdered as delverng capal servces and f no, how hey can be separaed from oher nvenores. Ths separaon would appear very dffcul emprcally, and an 4 For example, a chaned Laspeyres ndex of capal servces, obaned by aggregaon across dfferen asse ypes, would read as L / = u, K u, K 9