• Introduction

    One of the main objectives of the present Manual is to present an integrated and consistent approach towards capital measurement that encompasses different measures of capital stocks (gross, net and productive stock) alongside with the relevant measures of economic flows (investment, depreciation and capital services).

    Capital stock featured in two places in the 1993 SNA, as part of compilation of balance sheets and as a tool to derive estimates of depreciation or consumption of fixed capital (CFC). How is gross capital stock estimated? Basically by cumulating gross fixed capital formation (GFCF) year by year and deducting retirements. Because it makes no sense to aggregate expenditures undertaken in different years without adjusting for the difference in prices between those years, all capital stock figures are in “constant prices”. These prices may be the prices of the current year, in which case past expenditures are adjusted to the current price level or may be expressed at the prices of a given year, usually the one which is the base year for constant price national accounts.

  • How asset values are determined

    The central economic relationship that links the income and production perspectives to each other is the net present value condition: in a functioning market, the stock value of an asset is equal to the discounted stream of future benefits that the asset is expected to yield, an insight that goes at least back to Walras (1874) and Böhm-Bawerk (1891). Benefits are understood here as the income or the value of capital services generated by the asset.

    In what follows, we shall consider a single asset, although this is clearly unrealistic: no firm, and much less a statistical agency will measure capital by looking at individual pieces of machinery or equipment. The typical case is to consider classes of assets, although an attempt is normally made to keep these classes of assets as homogenous as possible. For the moment, however, consider a single asset that is new, i.e. of age zero.

  • Asset Retirement and the Gross Capital Stock

    To this point, only a single asset has been considered. This is unrealistic because in practice, data exists only on classes and cohorts of assets. A class of assets brings together similar assets, for example in line with a product classification. A cohort of assets exists when many units of the same asset are invested during a particular accounting period. Even when identical assets are purchased at the same point in time, it is unlikely that they are all retired at the same moment.

  • Depreciation or Consumption of Fixed Capital

    Depreciation is the loss in value of an asset or a class of assets, as they age. Depreciation is a flow concept and as such shares key features such as principles of valuation with other flows in the national accounts. Economically, depreciation is best described as a deduction from income to account for the loss in capital value owing to the use of capital goods in production.1 The meaning of the value loss in production explains also why “Consumption of fixed capital” (CFC) has been used as a synonym for “Depreciation” in the 1993 SNA. Similarly, in the United States national accounts, the term “Capital consumption” has been employed.

  • Net (“Wealth”) Capital Stock

    The stock of assets surviving from past periods, and corrected for depreciation is the net or wealth capital stock. The net stock is valued as if the capital good (used or new) were acquired on the date to which a balance sheet relates. The net stock is designed to reflect the wealth of the owner of the asset at a particular point in time. Hence, the notion of “wealth” stock which seems more telling than ‘net’ stock because there are other types of “net” capital measures, for example the productive stock is ‘net’ of efficiency losses of capital goods due to ageing. The net stock is the measure that enters balance sheets of institutional sectors.

  • Productive Stock and Capital Services

    The stock of a particular type of assets surviving from past periods, and corrected for its loss in productive efficiency is the productive capital stock1. Thus, productive stocks are directly related to the quantity and production aspect of capital. Productive stocks constitute an intermediate step towards the measurement of capital services. The assumption is made that the flow of capital services – the actual capital input into production – is proportional to the productive stock of an asset class. If the factor of proportionality is constant, the rate of change of capital services will equal the rate of change of the productive stock2. The same rate of change constitutes the volume component when it comes to splitting the change in the total value of capital services at current prices into a price and a volume component. A different way of seeing the productive stock of a particular type of asset is as the embodied volume of current and future capital services. The concept of a productive stock is only meaningful at the disaggregate level of a particular type of asset. Once each asset’s productive stock is combined with the corresponding capital service price (per unit of the productive stock), the resulting value represents the flow of capital services. This is the relevant variable for aggregation across different types of assets.

  • User Costs

    In a production process, labour, capital and intermediate inputs are combined to produce output. Conceptually, there are many facets of capital input that bear a direct analogy to labour input. Capital goods are seen as carriers of capital services that constitute the actual input in the production process. For purposes of productivity and production analysis, then, capital services constitute the appropriate measure of capital input. At present, however, the national accounts provide no measure of the value, price or volume of capital services.

    Consumption of fixed capital or depreciation is sometimes thought of as reflecting the full costs of using fixed assets. That this is a misconception can easily be shown by taking the case where fixed assets are not owned by a firm but rented from another unit who owns the capital good. The owner’s price charged for the rental will comprise not only depreciation (consumption of fixed capital), but other elements as well, for example an item reflecting financing costs of capital, lest the asset owner would make a permanent loss from renting out the asset.