Puck Taminiau-van Veen Measuring capital Puck Taminiau-van Veen

Overview Relevance Non-financial balance sheets Perpetual Inventory Method (PIM) Types of capital stock Results Exercise Conclusions

Relevance Consumption of fixed capital (depreciation) More than only growth figures Input for productivity measurement OECD handbook “Measuring Capital”

Non-financial balance sheets Produced assets Capital stock (fixed assets) Inventories Consumer durables (memorandum item) Non-produced assets Land Subsoil assets In combination with financial balance sheets:  total net worth

Fixed assets Fixed assets are produced assets used in production for more than one year. The following asset types are distinguished: Dwellings Other buildings and structures Machinery and equipment Weapons systems (after ESA 2010) Cultivated biological resources Intellectual property products (including R&D after ESA 2010)

Perpetual Inventory Method (1) Basic idea: Measures capital stock by following changes in capital stock Inputs required: time series of investments, price information, service lifes, other parameters

Perpetual Inventory Method (2) Output: Gross capital stock (replacement value) Productive capital stock (productive value) Net capital stock (market value)

Gross capital stock The stock of assets surviving from past investment and re-valued at the purchasers prices of new capital goods of a reference period The value of assets before deducting the consumption of fixed capital Gross capital stock ignores decay of assets and considers past investment as new (only retirement is taken into account) Capital stock measurement 8

Gross capital stock Gross capital stock in year t of assets purchased in year j Survival rate of t-j year old asset Replacement value in year t of assets purchased in year j Investments in historic prices Cumulative price index to revalue investments in prices of year t 9

Gross capital stock (example) In year 1, 20 cars are bought for € 20.000,- each Car prices rise with 2% each year Suppose that cars have the following survival function: Year (t) 1 2 3 4 5 6 Survival rate 100% 90% 80% 70% 60% 50% What is the gross capital stock after 5 years? Capital stock measurement 10

Gross capital stock (example) In year 1, 20 cars are bought for € 20,000.- each Car prices rise with 2% each year Suppose that cars have the following survival function: Year (t) 1 2 3 4 5 6 Survival rate 100% 90% 80% 70% 60% 50% What is the gross capital stock after 5 years? After 5 years, 60% of the cars are still in service Replacement value of cars in year 5 is 20 x € 20,000,- x (1.02)^5 = € 441,632.- Gross capital stock = 0.6 x € 441,632.- = € 264,979.- Capital stock measurement 11

Productive capital stock The stock of a particular type of assets surviving from past periods, and corrected for loss in productive efficiency Measured as the sum of past investments, weighted by an age-efficiency profile Embodied volume of current and future capital services Capital stock measurement 12

Productive capital stock Productive capital stock in year t of assets purchased in year j Gross capital stock in year t of assets purchased in year j Age efficiency of all assets of the age t-j that are still used in production Capital stock measurement 13

Example age-efficiency Year (t) 1 2 3 4 5 6 Age-efficiency 100% 85% 65% 45% 20% 0% During the first year the asset runs at 100 percent of its productive capacity, during the second period the figure is 85 percent and so on. Capital stock measurement 14

Productive capital stock (example) In year 1, 20 cars are bought for € 20,000.- each Gross capital stock in year 5 is € 264,979.- Suppose that cars have the following age-efficiency: Year (t) 1 2 3 4 5 6 Age-efficiency 100% 85% 65% 45% 20% 0% What is the productive capital stock after 5 years? Capital stock measurement 15

Productive capital stock (example) In year 1, 20 cars are bought for € 20,000.- each Gross capital stock in year 5 is € 264,979.- Suppose that cars have the following age-efficiency: Year (t) 1 2 3 4 5 6 Age-efficiency 100% 85% 65% 45% 20% 0% What is the productive capital stock after 5 years? After 5 years, cars have 20% productive capacity Productive capital stock is 0.2 x € 264,979.- = € 52,996 Capital stock measurement 16

Net capital stock The stock of assets surviving from past periods, and corrected for depreciation The net capital stock is valued as if the capital good (used or new) were acquired on the date to which a balance sheet relates Similar to productive capital stock of a single asset if age-efficiency profile is identical with age-price profile (geometric) Net capital stock is used for compiling the non-financial balance sheets Capital stock measurement 17

Net capital stock Net capital stock in year t of assets purchased in year j Gross capital stock in year t of assets purchased in year j Age-price profile of all assets of the age t-j that are still used in production Capital stock measurement 18

Net capital stock (example) In year 1, 20 cars are bought for € 20,000.- each Gross capital stock in year 5 is € 264,979.- Suppose that cars have the following age-price profile: Year (t) 1 2 3 4 5 6 Age-price profile 0.96 0.79 0.58 0.38 0.16 What is the net capital stock after 5 years? Capital stock measurement 19

Net capital stock (example) In year 1, 20 cars are bought for € 20,000.- each Gross capital stock in year 5 is € 264,979.- Suppose that cars have the following age-price profile: Year (t) 1 2 3 4 5 6 Age-price profile 0.96 0.79 0.58 0.38 0.16 What is the net capital stock after 5 years? After 5 years, cars have an age-price profile of 16% Net capital stock is 0.16 x € 264,979.- = € 42,396 Capital stock measurement 20

Balance sheets of net capital stock Structure of balance sheet for fixed assets: Opening balance sheet (stock 1/1) Revaluation Fixed capital formation (new) Consumption of fixed capital Acquisitions less disposals (existing) Other changes in volume Closing balance sheet (stock 31/12)

Consumption of fixed capital Negative change in value as result of normal wear and tear and obsolescence Annual change in net capital stock, before recording investments and other volume changes

Other items on balance sheet Revaluation Acquisitions less disposals (existing) Other changes in volume

Results (2012) Opening stock Revaluation Investments Depreciation (-)   Opening stock Revaluation Investments Depreciation (-) 2nd hand purchases, sales, etc Closing stock Billion € Dwellings 964,0 -34,8 25,0 17,4 0,1 936,8 Industrial buildings 384,9 -0,1 16,0 16,2 384,5 Other structures 340,2 8,7 13,9 10,7 352,0 Transport equipment 46,8 0,8 11,5 8,3 -2,4 48,3 Computers 12,4 -0,4 4,4 3,7 12,8 Machinery and installations 163,8 1,6 15,9 15,3 166,0 Other tangible assets 32,2 0,7 7,7 7,8 -0,2 32,6 Intangible assets 33,0 10,1 9,5 33,8 Total 1977,4 -23,3 104,5 89,0 -2,6 1966,9

Exercise

Conclusions Important to measure capital/non-financial balance sheets Use of PIM generates consistency Growing interest for information on non-financial assets Recommended by ESA

Questions?