Cost of capital services and the national accounts

1

UN STATISTICS DIVISION Economic Statistics Branch

National Accounts Section

UNSD/ECA National accounts workshop November 2005

Current SNA93 treatment and critique

Services from assets used in non-market production are reflected in output only as consumption of fixed capital.

Implies no return to capital used in non-market production as against the one employed for market production

Zero net operating surplus for non-market producers as output estimated on cost basis;

Output = IC+COE+COF Implies inconsistency in capital services rendered by

similar asset used in market and non-market production

Government and non-market producers–cost of capital of own assets

Implies different values for similar assets after initial purchase or different values of consumption of fixed capital

What is the way forward? (AEG decision in 2004) Treat similar assets as providing similar services

regardless of the nature of production. Therefore, include capital services as part of output of non-market producers.

Consider four types of assets: Assets used by civil servants, assets benefit the economy at large, assets used by the community at large and land.

Issues When summing costs to make estimates of output

for non-market producers, what should be used to reflect the cost of using non-financial assets:

Consumption of fixed capital only, which is the current recommendation, or the full cost of capital services (approximately consumption of fixed capital plus a return to capital)?

If the full cost of capital is chosen, should it apply to all non-financial assets owned by the non-market producer or just some of them?

Government and non-market producers–cost of capital of own assets

In country consultation opinions were dividedAgainst Non-market equals non-profit, so why should the

accounts include “profit” for government? Practical difficulties for implementation Including a return to capital for assets used in

non-market production means that GDP and NDP would increase and what then would happen to the resulting government operating surplus.

What rate of return for estimating the opportunity cost of the capital (discount rate)?

Government and non-market producers–cost of capital of own assets

For Measure of non-market output calculated as the sum

of costs, and capital services (user cost times volume of services) is a better measure of the costs incurred than is provided by the decline in asset value.

Data requirements are similar for estimating consumption of fixed capital via a PIM.

Government consumption expenditure would increase by the same amount.

Govt bond rate may be a good choice for the discount rate.

First type of asset: first priority

Assets used by civil servants in course of their work e.g. computer, vehicle, building

Determining capital service/ return to capital/ consumption of fixed capital straightforward

Second type of asset: 2nd priority

Assets bringing benefits to the economy at large e.g. roads and other infrastructure.

May be unique products so valuation may be more difficult than first type but valuation is needed for calculation of consumption of fixed capital.

Third type of asset

Used by the community at large e.g. recreational areas such as city parks, monuments

May be difficult to place a value on these Lower priority to estimate May be infeasible

Fourth type of asset Land

Produced Non-produced

As problematic as the third type

AEG decisions

The AEG reaffirmed the principle to include a return to capital on non-financial assets used in non-market production.

It was agreed to follow-up on a one-on-one basis the comments from the global and country consultations, including those comments on the scope, and report back to the next AEG Meeting in early 2006.

What is capital service? In production process, labour, capital and

intermediate inputs are combined to produce output

Employees/workers may be seen as repository of labour services

Similarly, capital goods used in the process of production are seen as carriers of capital services that constitute the actual input.

Capital service is the service provided by an asset used in the process of production.

When the Capital good “delivers” services to its owner, no market transaction is recorded.

What is capital service?

Measurement of this implicit transaction is one of the challenges of capital measurement for productivity analysis

Conceptually, capital services reflect a quantity, or physical concept, not to be confused with the value or price concept of capital

Service flows of an office building are the protection against rain, the comfort and the storage services that the building provides to personnel during a period

Price of the capital service is measured as the user costs or rental prices of capital

What is capital service? If there were complete market for capital

services, rental prices could be directly observed.

When a fixed asset such as a car is rented, rental paid is the payment for the capital service provided by the car. It is observable.

This is not the case for the many capital goods that are owned for which rental prices have to be imputed

The implicit rent that capital good owners ‘pay’ themselves gives rise to the terminology user cost of the capital

What is capital service?

When a fixed asset is used by its owner, the 1993 SNA record the cost of the capital only as consumption of fixed capital (CFC).

Capital service = CFC + return on capital

Capital services may be generated by fixed assets, inventories, land and other non-produced assets.

Capital services

Costs of capital services allow for measuring the contribution of each type of asset to value added and GOS, and makes it possible to study productivity.

However, it cannot be introduced into the national accounts in an isolated manner.

It should be compiled in an integrated and consistent manner with estimates of CFC and capital stock and an assumed rate of return.

Series of

GFCF

Rate of return

Age-efficiency

Productive Cap Stock

User cost

Total capital

services

Retirement

Age-price Net CS Balance sheets

Depreciation

CFC Net domestic product

Integrated system of Capital services, CS &CFC

AEG decisions

Confirmed the importance of including the concept of capital services in the updated SNA

Strongly supported including the estimates of capital services in supplementary tables rather than in the core accounts of the SNA

Confirmed that capital services (comprising depreciation and return to capital) and capital stock measures should be compiled in an integrated and consistent manner

AEG decisions

agreed that the basic concepts of the capital services approach be presented in the SNA and that the detailed recommendations would be elaborated in an updated version of the OECD manual on “Measuring Capital”

agreed that the concepts underlying the formulae presented in the paper (“Cost of capital services”, document number SNA/M1.05/04; Issue 15) are appropriate, subject to detailed checking.

AEG decisions The group confirmed the

importance of measuring capital services but a large majority did not favor including “of which” items in the core accounts. Instead, there was considerable support for a chapter/annex on the measurement of capital in the updated SNA.

Thank You