Measuring Capital - OECD Manual 2009

Second edition

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Capital - in particular of the physical sort - plays several roles in economic life: it constitutes wealth and it it provides services in production processes. Capital is invested, disinvested and it depreciates and becomes obsolescent and there is a question how to measure all these dimensions of capital in industry and national accounts. This revised Capital Manual is a comprehensive guide to the approaches toward capital measurement. It gives statisticians, researchers and analysts practical advice while providing theoretical background and an overview of the relevant literature. The manual comes in three parts - a first part with a non-technical description with the main concepts and steps involved in measuring capital; a second part directed at implementation and a third part outlining theory and a more complete mathematical formulation of the measurement process.

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Age-price and Depreciation Profiles

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.

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