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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The Perpetual Inventory Method – Overview

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.

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