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Capitalization of Military Weapons Systems in the U.S.

National Accounts

Brent R. MoultonWorking Party on National Accounts, OECD

Paris

October 25–28, 2011

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Why SNA 2008 capitalizes weapons

▪ SNA 2008 recognizes that military personnel are engaged in production and use weapon systems continuously in the production of defense services

▪ Weapon systems have value and can be resold

▪ Consistent with international public sector accounting standards

▪ Service lives and depreciation account for decline in value over time and the need for eventual replacement

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Effects of new treatment

▪ SNA 1993 treated purchases of weapons systems as intermediate consumption

▪ SNA 2008 reclassifies weapons purchases as gross fixed capital formation (GFCF) Lowers final consumption expenditures and

raises GFCF by equal and offsetting amounts

▪ SNA 2008 includes weapons systems in consumption of fixed capital (CFC) Raises final consumption expenditures and GDP

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Effects on U.S. national accounts

▪GDP level - for 2010: Purchases of weapons systems were

about $105 billion (or 0.7 percent of GDP) Reclassified from consumption expenditures

to GFCF

CFC for weapons systems was about $74 billion (or 0.5 percent of GDP) Raised general government final consumption

expenditures and GDP

▪Modest effects on GDP growth rate, trends

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Perpetual inventory method

▪CFC and net stocks are calculated using the perpetual inventory method (PIM)

▪Method is described by: OECD, Measuring Capital: OECD

Manual 2009, second edition Bureau of Economic Analysis, Fixed

Assets and Consumer Durable Goods in the United States, 1925–97, (2003), available at www.bea.gov

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Outline of PIM

▪ Determine age-price/depreciation profile for each type of asset May be geometric or straight-line

▪ Determine retirement profile (straight-line)▪ Apply profiles to net stock (geometric) or to

time-series of investment (straight-line) at constant prices

▪ Calculate end-of-period net stock as beginning stock plus investment less other changes in assets less depreciation (at constant prices)

▪ Reflate to current prices

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Setting depreciation/service lives

▪ For service lives, BEA staff consulted with staff from the Department of Defense

▪ Declining balance rates were used to convert service-life information to depreciation rates

▪ Geometric depreciation profiles are used for all asset types except missiles, which use straight-line

▪ For more information, see Fixed Assets and Consumer Durable Goods, available at www.bea.gov

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BEA depreciation rates/service livesExamples – selected weapons system assets

Asset type Geometric depreciation rate

(percent)

Service life (years)

Aircraft:

Air frames 7 to 11 15 to 25

Engines 28 6

Strategic missiles N.A. (straight line) 20

Ships 6 to 7 25 to 30

Tanks and armored personnel carriers

8 20

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Other changes in assets

▪ For weapons systems, other changes in assets may represent war losses or the scrapping of equipment after a war.

▪ War losses affect the PIM calculation in the following ways: The loss itself is subtracted to derive end-

of-period net stock. Depreciation on the loss is computed using

a half-year convention. This “depreciation” is subtracted from both beginning-of-period net stocks and CFC.

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Implementation in U.S. accounts

▪ Based on advisory expert recommendations, BEA began capitalizing military weapons systems in its national accounts in 1996

▪ For international comparability, data submitted to OECD apply the SNA 1993 treatment This is the only NIPA/SNA adjustment that

affects GDP

▪ When BEA implements the other major SNA 2008 changes in 2013, it will no longer need to make this adjustment

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