World Congress on National Accounts and Economic Progress, Washington, D.C., May 2008 Capital and the National Accounts Paul Schreyer, OECD

Background 1993 SNA being revised Some important issues for revision concern non-financial assets New OECD Manual on Measuring Capital: companion product to 2008 SNA Key messages/issues on capital measures as they emerge from the Manual

1. Towards a comprehensive and consistent framework In the 1993 SNA, two main purposes of non- financial capital measures As balance sheet entry As basis for the calculation of CFC (depreciation) Apart from depreciation, no role for capital in the production and generation of income accounts In particular, no recognition of capital services But capital services, along with labor services constitute the fundamental input variables for any analysis of production or productivity

Fundamental – the dual nature of capital… A storage of wealth (wealth aspect) A source of capital services (production aspect) Wealth aspect was recognised in the 1993 SNA but not the production aspect 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

… with capital as input to production = capital services Methodology originated by Jorgenson and Griliches (1967) Basic idea: an age-efficiency profile determines the (productive) capital stock for each type of asset Capital services for each type of asset = proportional to productive stock of each asset Price of capital services = user cost of capital (Walras 1874, Jorgenson and Griliches 1967, Diewert 1974, Hulten 1990 and others) Aggregation across assets with user cost weights

… and with capital as wealth Basic idea: an age-price (depreciation) profile determines the net (wealth) capital stock Net stock = balance sheet entry Aggregation across assets with asset price weights Next graph: from 1993 SNA to 2008 SNA

Capital measures in the 1993 SNA

Integrated set of capital measures

Towards a comprehensive and consistent framework Objective: consistent treatment of Net stocks – Productive stocks – Capital services - Depreciation – Investment Intregrated system shown in Jorgenson and Landefeld (2006) and in the forthcoming OECD Capital Manual Important accomplishment: ability to provide split of the income side of the national accounts into price and volume components

But… Despite basic recognition of integrated system of capital measures in 2008 SNA Capital services measures remain optional measures, and not standard measures in the core account, However, individual countries are free to introduce them as such

But… Capital services measures will not apply to non- market producers Capital input will continue to be measured as CFC only Practical reasons (which rate of return?) Conceptual reasons Should there be a net return to government assets? Should GDP go up with a rise in interest rates? Some countries (Australia) will implement return to government capital Treatment in OECD Manual

2. Some other issues: geometric profiles The Manual recommends geometric age- efficiency and age-price patterns– they are simple and empirically justified Non-geometric patterns are also correct but fully consistent implementation is much more complicated

Some other issues: Depreciation and obsolescence What is the link between them; what are the measurement implications? Old discussion (Hayek, Pigou in the 1920s) Treatment of expected holding (gains) and losses Manual: More than one measure possible, depending on analytical question In particular, what is desired notion of net income, the main purpose of depreciation measurement? Manual suggests excluding expected HGL from NA depreciation measures More discussion by A. Katz

Some other issues: calculations of rates of return 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. Does it matter? Evidence is mixed: several studies suggest robustness of capital service measures with regard to the specifications for the return to capital, others show bigger impact Manual discusses pros and cons but does not come down with a strong conclusion

Some other issues: 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. Further work by statistical offices encouraged But note: important new surveys in Canada, Japan and in the Netherlands

Some other issues: scope of assets Computation of capital services measures and balance sheets should not be limited to fixed assets Important: Inventories Land Natural resources Major challenge, but well under way: capitalisation of R&D

Conclusion With revised SNA, international community has made important step in acknowledging existence of capital services measures and in moving towards integrated system. More discussion may be needed to fully convince national accountants and to encourage implementation of a full set of capital measures Some conceptual and empirical issues remain and should be high on the research agenda More solid empirical evidence is needed on depreciation More empirical evidence is needed to value non- produced assets and to move towards complete balance sheets

Not too late for comments on the Manual! Merci