UN-ECE/Eurostat/OECD Meeting on National Accounts April 2008 Geneva Measuring Capital Services OECD Agenda item 2a Invited paper 4

Contents Background Basic idea: what are capital services? Purpose of capital services measures

Background 2003: United Nations Statistical Commission (UNSC) calls for update of the 1993 System of National Accounts Canberra II Group dealt with issues concerning the measurement of non-financial assets This included also capital services measurement in the national accounts Result: capital services are now recognised in the revised SNA but implementation is up to countries

What are capital services? (1) Anyone who is familiar with the user cost approach towards owner-occupied housing already knows what capital services are But some more explanation may be helpful There are two aspects to capital: –It is a storage of wealth (wealth aspect) –It has a role in the production of goods and services (production aspect)

What are capital services? (2) Wealth aspect –Captures the market value of capital goods  valuation of the stock at market prices –The appropriate entry for balance sheets –Corresponds to the net capital stock in the SNA93 Production aspect –Captures the flow of productive services from capital into production –The appropriate variable for productivity measurement –Requires a different stock measure – the productive stock

What are capital services? (3) Volume of capital services –Assumed to be proportional to the productive stock –Then, volume growth of productive stock = volume growth rate of capital services Productive stock –Takes into account efficiency loss of older asset  an age-efficiency profile is applied Wealth stock –Takes into account total value loss of older asset  an age-price profile is applied

What are capital services? (4) Price of capital services =User costs per unit of productive stock –Main elements of user costs: Real rate of return (r) Rate of CFC (d) Real holding gains/losses (left out in simplified approach)

What are capital services? (5) Total value of capital services –Price of K-services * Productive stock –Simplest form: (r+d)p*K –This corresponds to the user cost approach towards owner occupied housing (ignoring intermediate inputs)

Purpose of capital services measures (1) Normally, no link between value-added and capital, except for CFC as the measure that brings us from GOS to NOS Capital services measures establish the link between capital input and value-added: Total value of capital services can be equated with GOS (plus the capital part of mixed income)

Purpose of capital services measures (2) Consequence: the income side of the account can be de-composed into a price and into a volume component –Price component: wages and prices of capital services (=user costs) –Volume component: numbers employed and volume of capital services With volume measures for labour and capital, combined measures of volume inputs can be computed Volume output/volume input = MFP

Capital measures in SNA93 Time series of GFCF by type of asset all expressed at same mid- year prices Retirement profile Net capital stock Balance sheets Net domestic product Consumption of fixed capital Age-price or depreciation profile

Integrated system of capital measures Age- efficiency profile Time series of GFCF by type of asset all expressed at same mid-year prices rate of return Retirement profile Age-price profile Deprieciation profile Productive capital stock/capital services by asset Net capital stock Consumption of fixed capital Balance sheets Total capital services User costs of capital Net domestic product

The distinction between net capital and capital services matters empirically: example USA

Conclusions Capital services measures add significant analytical value to national accounts – price/volume split of income side and productivity measurement Capital services, net capital stock, CFC and GFCF should form a consistent and integrated set Implementation requires extra effort but much of the empirical requirements are also needed for good quality measures of CFC and net stocks

More details… Forthcoming chapter in revised SNA OECD Capital Manual –Draft version on OECD website –Final version available by June 2008 Contact: