BEA’s Measures of Capital Robert Kornfeld UNECE/Eurostat/OECD Task Force on Measuring Sustainable Development September 23-24, 2009

bea.gov 2 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.gov 3 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.gov 4 BEA’s Fixed Asset Accounts  Perpetual Inventory Method  Net stock: S t = (1-d)*S t-1 + (1-d/2)* I t  where s t = net stock at time ‘t’  d = depreciation rate  i t = investment at time ‘t’  Depreciation M t = I t – (S t – S t-1 )  Geometric rates are used for most asset types

bea.gov 5 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.gov 6 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.gov 7 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.gov 8 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.gov 9 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.gov 10 The Knowledge Economy: The Importance of Updating Economic Measurements

bea.gov 11 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.gov 12 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.gov 13 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.gov 14 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.gov 15 R&D Price Index Options - Sample

bea.gov 16 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.gov 17 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.gov 18 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