Cost of capital services and the national accounts

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Cost of capital services and the national accounts
UN STATISTICS DIVISION Economic Statistics
Branch National Accounts Section
UNSD/ECA National accounts workshop November
2005
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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 ICCOECOF
• Implies inconsistency in capital services
  rendered by similar asset used in market and
  non-market production

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Government and non-market producerscost 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.

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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?

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Government and non-market producerscost of
capital of own assets

• In country consultation opinions were divided
• Against
• 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)?

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Government and non-market producerscost 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.

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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

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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.

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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

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Fourth type of asset

• Land
• Produced
• Non-produced
• As problematic as the third type

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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.

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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.

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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

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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

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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.

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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.

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Integrated system of Capital services, CS CFC
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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

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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.

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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.

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• Thank You