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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Service Lives and Retirement of Assets

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.

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