Most but not all of the stock and flow measures considered in this Manual relate to “produced”, non-financial objects (fixed assets and inventories) that are included in gross capital formation as defined in the national accounts. Produced non-financial assets come into being via the production process or as imports.

Table 9.1 gives the full listing of non-financial assets recognised in that system. For a treatment of other natural resources such as subsoil assets, the reader is referred to the Handbook on Integrated Environmental and Economic Accounting (United Nations et al. 2003) and to Section 18.3. Note that two items related to non-produced assets are part of the produced assets. These are major improvements to land and costs of ownership transfer on non-produced assets.

The perpetual inventory method (PIM) is the most widely used approach towards measuring stocks and flows of fixed assets. It rests on the simple idea that stocks constitute cumulated flows of investment, corrected for retirement and efficiency loss. The basic sequence of implementation is shown in the figure below.

  Two entry points exist into the computation process: by defining the age-efficiency profile for each type of asset (starting point A) or by defining the age-price/depreciation profile for each type of asset (starting point B). The next step is to define a retirement profile with its parameters, among them the average and the maximum service life.

  The retirement profile is combined with the age-efficiency profile (path A) or with the age-price profile (path B) to yield an age-efficiency/retirement profile for a cohort or an age-price/retirement profile for a cohort. In the case of geometric depreciation, the two profiles coincide and the implementation process starts only here.

In this document, consumption of fixed capital or depreciation has been defined as the loss in value of an asset due to physical deterioration (wear and tear), and due to normal obsolescence. Depreciation is a value concept, to be distinguished from quantity concepts such as the age-efficiency function that capture losses in an asset�fs productive efficiency. There are several ways of determining depreciation parameters. They include:

  Start from empirical information about assets' service lives, and make an additional assumption about the functional form of the depreciation pattern. The various approaches towards assessing service lives empirically are described in Section 13.1;

  Use information on depreciation implicit in used asset prices and exploit it econometrically;

  Derive age-price and depreciation patterns from age-efficiency profiles;

  Use a production function approach and estimate depreciation rates econometrically.

  4. The first two methods are by far the most common ones and will be described in some detail below. The production function approach will be described very succinctly.

The accuracy of capital stock estimates derived from a PIM is crucially dependent on service lives – i.e. on the length of time that assets are retained in the capital stock, whether in the stock of the original purchaser or in the stocks of producers who purchase them as second hand assets. Note that the asset life is understood here as an economic notion,1 and not as a physical or engineering notion of capital goods. This is important because it implies that asset lives can change over time simply due to economic considerations even if the asset remains physically unchanged. In fact, economic service lives are one avenue by which obsolescence manifests itself – the decision to retire is taken because a new and possibly more productive and/or cheaper asset appears, rendering the old model obsolete.

More precisely, the average or mean service life has to be distinguished from the maximum service life of a cohort of assets because the service lives of the same assets within a cohort are normally described by a retirement or mortality function, more of which below. The first section below looks at the sources that are available to estimate service lives, the next section considers evidence that service lives may be changing over time, and a final section looks at how errors in service life assumptions may affect reliability of capital stock estimates. Annex 1 shows the service lives used by several countries.

To this point, most of the discussion has been conducted with reference to a single (type of) asset. Many concepts are indeed best conveyed in this manner but aggregation plays an important role in how the concepts of productive stock, capital services, net stock and capital composition translate into measurement.

The single most important point in this context is that it is the process of aggregation that essentially shapes the difference between capital services and the net or wealth capital stock. At the level of individual assets, the productive stock may differ from the net capital stock but not necessarily so. The most important case where the two measures coincide is in the presence of constant, geometric rates of depreciation which imply the same rates of efficiency decline and hence identity between productive and net stock at the asset level. However, for all types of age-efficiency and age-price profiles, when the productive stock is multiplied through by an expression for unit user costs, a difference arises between the value of the net stock and the value of capital services. This difference carries through in the aggregation across types of assets, because aggregation weights differ in the two cases.