Varying the User Cost: A New Zealand Perspective Joel Cook December 2006

Indexes Output –Based on published Valued Added Labour –Hours paid

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

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

User Cost Where: p ijt = the price index of new capital asset i it = the nominal rate of return d ijt = the rate of economic depreciation g ijt = the capital gain effect due to the revaluation of the asset x it = the average non-income tax rate on production

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

Inventories Should inventories be included as capital stock?

Capital Gains Should capital gains be applied? Should it be applied uniformly over all assets?

Capital Gains (cont) Published Capital gains on all assets No capital gains on any assets One year capital gains on all assets

Varying the Capital Gains Capital Services Capital Productivity Multifactor Productivity Average annual change (%) Published Capital gains on all assets No capital gains on any assets One year capital gain on all assets

Varying the capital gains

Endogenous or Exogenous rate of return User cost of capital can be calculated using an: 1.Endogenous rate of return Or 2.Exogenous rate of return

Endogenous rate of return Ex post Uses available information Requires strict conditions to be met

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

Varying the rate of return Capital Services Capital Productivity Multifactor Productivity Average annual change (%) Endogenous (published) Exogenous

Endogenous vs Exogenous rate of return

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

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

Conclusions (cont) Varying the rate of return did not have a large impact Time series may not be long enough

Discussion points Inventories Capital gains Dealing with negative user costs