Varying the User Cost: A New Zealand Perspective

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Varying the User Cost A New Zealand Perspective

• Joel Cook
• December 2006

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Indexes

• Output
• Based on published Valued Added
• Labour
• Hours paid

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Capital input

• Starting point is the National Accounts perpetual
  inventory method (PIM)
• Productive capital stock
• Gross fixed capital formation adjusted for
  efficiency decline and retirements
• 24 assets are included from the PIM
• Livestock, timber and land are calculated
  separately and added to the capital stock

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Capital input (cont)

• Each asset generates a flow of capital services
• Each asset is weighted by its user cost
• Cost of using or renting the asset for a period
• Similar to the wage rate in the labour market

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User Cost

• Where
• pijt the price index of new capital asset
• iit the nominal rate of return
• dijt the rate of economic depreciation
• gijt the capital gain effect due to the
  revaluation of the asset
• xit the average non-income tax rate on
  production

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Issues faced

1. Inclusion of inventories
2. Capital gains term
3. Endogenous or exogenous rate of return

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Inventories

• Should inventories be included as capital stock?

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Capital Gains

• Should capital gains be applied?
• Should it be applied uniformly over all assets?

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Capital Gains (cont)

• Published
• Capital gains on all assets
• No capital gains on any assets
• One year capital gains on all assets

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Varying the Capital Gains
Capital Services Capital Productivity Multifactor Productivity
Average annual change () 1988-2005 Average annual change () 1988-2005 Average annual change () 1988-2005
Published 2.5 0.3 1.8
Capital gains on all assets 2.8 0.0 1.6
No capital gains on any assets 2.3 0.5 1.8
One year capital gain on all assets 3.3 -0.4 1.4

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Varying the capital gains
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Endogenous or Exogenous rate of return

• User cost of capital can be calculated using an
• Endogenous rate of returnOr
• Exogenous rate of return

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Endogenous rate of return

• Ex post
• Uses available information
• Requires strict conditions to be met

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Exogenous rate of return

• Ex ante
• Does not take account of industries risk
  profiles
• Actual investment decisions are based on ex ante
  rate of return

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Varying the rate of return
Capital Services Capital Productivity Multifactor Productivity
Average annual change () 1988-2005 Average annual change () 1988-2005 Average annual change () 1988-2005
Endogenous (published) 2.5 0.3 1.8
Exogenous 2.3 0.5 1.8
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Endogenous vs Exogenous rate of return
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Conclusions

• Inventories need to be taken into account
  somehow, but is including them as capital stock
  the best option?

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Conclusions (cont)

• Varying the capital gains has a significant
  impact on the capital services
• The choice of including a capital gains term
  should not be taken lightly

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Conclusions (cont)

• Varying the rate of return did not have a large
  impact
• Time series may not be long enough

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Discussion points

• Inventories
• Capital gains
• Dealing with negative user costs