BEA’s Measures of Capital

Robert KornfeldUNECE/Eurostat/OECD Task Force on Measuring Sustainable Development

September 23-24, 2009

bea.gov2

Outline

1. BEA’s core fixed asset accounts

2. Experimental or satellite measures of capital• Integrated BEA-BLS productivity accounts

• BEA’s R&D satellite account

• Human capital and home production

3. Conclusion

bea.gov3

BEA’s Fixed Asset Accounts

• Fixed assets are produced assets, which include Nonresidential fixed assets

Equipment and Software

Structures

Residential fixed assets (primarily housing)

Government fixed assets

Equipment and Software

Structures

• Valued at current cost, real cost, historical cost

bea.gov4

BEA’s Fixed Asset Accounts

Perpetual Inventory Method

Net stock: St = (1-d)*St-1 + (1-d/2)* It

where st = net stock at time ‘t’

d = depreciation rate

it = investment at time ‘t’

Depreciation Mt = It – (St – St-1)

Geometric rates are used for most asset types

bea.gov5

BEA’s Fixed Asset Accounts

CFC and Sustainability

CFC is the decline in the value of the stock of assets due to wear and tear, obsolescence, accidental damage, and aging.

CFC is deducted from the appropriate gross investment to obtain net investment in fixed assets. Net investment is an indicator of whether the corresponding capital stocks have been maintained intact.

bea.gov6

BEA’s Fixed Asset Accounts

Measuring Fixed Assets

Asset definition and asset boundary are clear Source data on investment is available and reliable Prices are market prices Depreciation used geometric rates based on research Perpetual inventory model can be implemented

bea.gov7

BEA-BLS Integrated Production Account

• US BLS estimates multifactor productivity (MFP) for private business

• MFP currently does not include • General government• Non-profit institutions serving households• Owner-occupied housing

• Harper, Moulton, Rosenthal, and Wasshausen, 2009• Detailed reconciliation of BEA and BLS statistics.• Integrated production account for private business sector• Expands core MFP estimates to include non-market government and

non-profit sectors, using BEA’s capital stock data for these sectors.

bea.gov8

BEA-BLS Integrated Production Account

Why Is Integration Needed?

Decentralized statistical system in the United States – BEA, BLS, Census, FRB

Calls for integration: System of National Accounts 1993 Jorgenson, Landefeld and Nordhaus, A New Architecture

for the U.S. National Accounts U.S. Dept. of Commerce – Measuring Innovation in the

21st Century Economy Advisory Committee Important potential applications of integrated GDP-production

accounts

bea.gov9

BEA-BLS Integrated Production Account

Non-market (government, nonprofit) production

Two major challenges: Directly measuring changes in real output

International efforts to measure volume of certain services, such as health and education, for non-market producers

Measurement of capital services requires a measure of net return Possible approaches - Market interest rates, “real” interest

rates, internal rates for other sectors.

bea.gov10

The Knowledge Economy:The Importance of Updating Economic Measurements

$0

$2

$4

$6

$8

$10

$12

$14

$16

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

[GDP, Trillions of dollars]

1985: Worked with IBM to develop more accurate, quality-adjusted, computer prices.

2003: Share of GDP using quality-adjusted prices rises to nearly 1/5 of GDP.

2001: Introduced quality-adjusted prices for LANs

1999: Recognized investment in software and Introduced new services measures that capture the effect of new technology.

1996: Introduced chain-type measures of real GDP that better reflect the prices of high-tech and introduced new semi-conductor prices.

2006: BEA published preliminary R&D accounts

2007: BEA published updated R&D accounts

2009: BEA published framework for measuring intangibles and innovation

bea.gov11

BEA’s R&D Satellite Account

Provides a means of exploring the impact of capitalizing R&D spending on GDP growth

Provides a framework through which various methodological and conceptual issues can be worked out

Part of broader BEA program to improve measures of intangibles in national accounts

Why R&D? Good data on R&D expenditures collected by the National Science

Foundation for over 50 years Numerous studies of rates of return Greater professional agreement on its capitalization 2008 SNA recommends treating R&D expenditures as investment

BEA plans to incorporate R&D as a capital asset into the core accounts by 2013

bea.gov12

R&D Satellite Account: Conceptual Challenges

Definition of the unit of R&D output

R&D output price index

Depreciation and obsolescence

Public goods qualities of R&D

bea.gov13

R&D Satellite Account

Problems with Traditional Output Price Index

• Most R&D is produced on own account and not sold on markets.

Even when sold, the traditional price index method breaks down because R&D products are unique.

(Note – Traditional price indexes are based on repeated sales of an identical product.)

Unit of output volume is also not defined. Must turn to indirect approaches.

bea.gov14

R&D Satellite Account

Options for Output Prices

• Input Prices

• Productivity Adjusted Prices

• Downstream product prices Applied in 2007 BEA R&D satellite account.

• Other options

bea.gov15

R&D Price Index Options - Sample

0

20

40

60

80

100

120

140

160

78 80 82 84 86 88 90 92 94 96 98 00 02 04

I n

d e

x

Downstream product price Input price

Productivity adjusted price

bea.gov16

R&D Satellite Account

Measures of Depreciation

Difficult to measure because depreciation is often related to obsolescence, which can vary immensely across intangible assets.

Depreciation rates for these intangibles are necessarily based on assumptions guided by limited evidence

bea.gov17

Human Capital

BEA initiative would provide estimates of the stock of human capital, the rate at which the stock depreciates, and the returns to human capital investments.

Some limitations, largely because of limitations in source data

Limited to individuals’ investments in their human capital -- and not on-the-job training.

BEA will measure market-based investments in education, not individuals’ investments in time.

bea.gov18

Summary

Expanding the capital asset boundary requires addressing numerous measurement challenges

Defining the asset and its score

Defining and measuring investment

Prices/valuation

Depreciation

Rates of return/capital services