|Source: U.S. Bureau of Economic Analysis, Fixed Assets and Consumer Durable Goods in the United States, 1925-97 (forthcoming in early 2001); and Survey of Current Business, April 2000.

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*Methodology for Net Stocks and Depreciation

The primary measure of the value of fixed reproducible tangible wealth is the net stock, that is, the value of the stockadjusted for depreciation. Depreciation is the decline in value due to wear and tear, obsolescence, accidental damage, andaging. For business and government, in addition to its use in calculating net stocks, the same depreciationconsumption offixed capitalis presented as part of the NIPA's. Consumption of fixed capital is a charge for the using up of fixedcapital, and as such, it is, along with compensation of employees and other components of gross domestic income and grossnational income, one of the costs incurred and the profits earned in the production of gross domestic product (GDP) andgross national product (GNP). Consumption of fixed capital is deducted from GDP and GNP to derive net domestic productand net national product. In addition, government consumption of fixed capital is a component of government consumptionexpenditures (and GDP) as a measure of the value of the services of government fixed assets.

The net stock estimates in this article are presented in terms of two valuationscurrent cost and real cost. Current-cost (or"replacement-cost") valuation expresses all assets in the net stock in terms of the prices that prevailed in the period to whichthe stock estimates refer. For example, the yearend 1995 net stock estimate in current-cost valuation shows the assets thatwere in the stock at yearend 1995 expressed at the market prices prevailing for those assets at yearend 1995. Thereal-cost estimates are expressed either as quantity indexes or in "real" dollars, with 1996 as the base period.

Overview of methodology

Estimates of net stock and depreciationunder both the new and old methodologiesare derived using the perpetualinventory method, which is based on the accumulation of investment flows. With this method, both the net stock anddepreciation of any given type of asset is a weighted average of past investment in that asset. Specifically, the net stock iscalculated as the cumulative value of past gross investment less the cumulative value of past depreciation. The initialcalculations are performed in real terms; current-dollar values are estimated by reflation.

Calculations of net stocks and depreciation are based on real investment data at the type-of-asset level of detail, whichgenerally is the same level of detail as that presented in NIPA tables 5.7, 5.9, and 5.15, and real consumer purchases ofdurable goods, which generally is the same level of detail presented in NIPA table 2.7. At this detailed level, realinvestment in a given type of asset is obtained by dividing current-dollar investment in that type by the price index for newassets of that type, expressed as 1996=100, multiplied by 100. (Real investment for higher levels of detail shown in theNIPA tables is calculated using BEA's chain-type annual-weighted indexes.)

Under the new methodology, most assets are assumed to have depreciation patterns that decline geometrically over time. Fora given year, the depreciation charges on existing assets are obtained by multiplying the prior year's charge by one minus theannual depreciation rate. For each type of asset, depreciation is cumulated over all vintages, and net stocks are estimatedby subtracting cumulative depreciation from cumulative gross investment.

As is the case for real investment, year-to-year growth rates for both depreciation and net stocks on a real-cost basis forhigher level aggregates are then computed using the annual-weighted Fisher index. These rates are chained together to obtaincumulative growth rates, which in turn are used to obtain estimates of levels expressed as indexes (1996=100) and aschained (1996) dollars.

Current-cost estimates (in dollars) are obtained by "reflating" real estimates at the type-of-asset level. Depreciation isreflated to current cost using indexes that reflect average prices of new assets for the year; net stock is reflated to currentcost using indexes of prices of new assets for the current yearend. Current-cost aggregates are obtained by directly summingcurrent-cost estimates for the various types of assets. Finally, estimates by type of asset are adjusted for the net value ofassets destroyed in wars and natural disasters.

Investment flows

The investment flows in new equipment and structures by type and the transfers of used assets used to implement theperpetual inventory method come from the revised NIPA's. For privately owned assets, investment by type of asset isdistributed by industry and by legal form of organization, primarily through the use of data from BEA's benchmarkinput-output accounts for 1982 and 1987 and from the 1987 and 1992 Economic Censuses. These flows are modified toaccount for transfers of used assets between sectors of the economy. (Because of the lack of information, transfers of usedassets within sectors are not accounted for in the wealth estimates.)

Depreciation patterns and depreciation profiles

In the perpetual inventory method, the pattern of depreciation charges for a given asset is determined by its "depreciationprofile." The new methodology for estimating depreciation uses depreciation profiles that reflect a geometric pattern and thatreplace the previously used profiles, which were based on straight-line depreciation and on assumed patterns ofretirements. The depreciation profile for a given type of asset describes the pattern of how, in the absence of inflation, theprice of an asset of that type declines as it ages. Although the profile for a given type of asset is assumed to be constant overtime, different vintages of a given type of asset may have profiles that differ from those of other vintages of the same type ofasset.

The new net stock and depreciation methodology uses depreciation profiles that are based on empirical evidence on usedasset prices. Ideally, the profiles for each type of asset should be estimated using prices for used assets in resale markets,but such studies have only been conducted for some types of assets. However, the available studies suggest that, in general,depreciation profiles are more closely approximated by a geometric pattern of price declines than by a straight-line pattern.Consequently, in the revised estimates, the depreciation profiles for most assets were assumed to be strictly geometric, andthe appropriate rate of declining-balance depreciation was taken from empirical studies of similar classes of assets. Thedepreciation rates for specific types of assets were then determined by dividing the appropriate declining-balance rate foreach asset by the asset's assumed service life. For autos and for computers and computer peripheral equipment, two classesof assets for which information on used asset prices makes it possible to estimate the underlying depreciation profiles, theactual empirical profiles were used. For computers and peripheral equipment, the profiles were taken from studies byStephen Oliner. For missiles and nuclear fuel rods, depreciation was estimated using a straight-line pattern and aWinfrey retirement pattern, which is essentially a bell-shaped curve.

The new geometric depreciation rates and the associated declining-balance depreciation rates and service lives used byBEA to derive the new estimates of net stocks and depreciation are shown in table A. Except as previously noted, BEA'sdepreciation rate equals the declining-balance rate divided by the service life. The rate of declining-balance depreciation isthe multiple of the comparable straight-line rate used to calculate the geometric rate of depreciation. For example, a 1.65declining-balance depreciation rate refers to a geometric rate of depreciation of 1.65/L, where L is the service life of theasset in years and 1/L is the straight-line rate. Separate service lives are used for each type of asset and for the estimates offixed private capital; separate service lives are also used in different industries for certain types of assets. Most of theservice lives are held constant over time because the information necessary to estimate changes in them is not available. Thelives themselves are based on a wide variety of sources and for most types of assets, are the same as those used for thepreviously published estimates.

*Wealth estimates

Fixed reproducible tangible wealth consists of fixed private capital, fixed government capital, and durable goods owned byconsumers.

Fixed private capital consists of equipment and structures, including owner-occupied housing, that are owned by private businessor nonprofit institutions and that are located in the United States.

Fixed government capital consists of equipment and structures that are owned by the Federal Government and by State and localgovernment agencies, including government enterprises, and that are located in the United States (except for national defenseequipment, for which coverage is worldwide).

Durable goods owned by consumers are the goods that are purchased by households for their nonbusiness use and that have a lifeexpectancy of at least 3 years.

Capital stock consists of fixed private capital and fixed government capital.

All of the wealth estimates are classified by type of asset. In addition, estimates of fixed private capital are further classified by legalform of organization.

Corporate business consists of all entities required to file Federal corporate income tax returns (IRS Form 1120 series), includingmutual financial institutions and cooperatives subject to Federal income tax, private noninsured pension funds, nonprofitorganizations that primarily serve business, Federal Reserve banks, and Federally sponsored credit agencies.

Sole proprietorships consists of all entities that are required to file IRS Schedule C (Profits or Loss From Business) or Schedule F(Farm Income and Expenses) if the proprietor meets the filing requirements and of owner-occupied farm housing.

Partnerships consists of all entities required to file Federal partnership income tax returns, IRS Form 1065 (U.S. Partnership Returnof Income).

Other private business consists of all entities that are required to report rental and royalty income on the individual income tax returnin IRS Schedule E (Supplemental Income and Loss) if the individual meets the filing requirements, tax-exempt cooperatives,owner-occupied nonfarm housing, and buildings and equipment owned and used by nonprofit institutions that primarily serveindividuals.

Estimates for fixed private capital are also presented by industry on the basis of the 1987 Standard Industrial Classification (SIC).Industry data are presented on an "establishment" basis; an establishment, as defined for the purposes of the SIC, is an economicunit, generally at a single location, where business is conducted or where services or industrial operations are performed.

In addition, the corporate business stock estimates are presented in two groups of SIC industries. Financial industries consists ofthe following SIC industries: Depository institutions, nondepository institutions, security and commodity brokers, insurance carriers,regulated investment companies, small business investment companies, and real estate investment trusts. Nonfinancial industriesconsists of all other private industries.

Estimates of residential capital are also classified by "tenure group"that is, tenant-occupied residential capital and owner-occupiedresidential capital. Tenant-occupied residential capital consists of rental housing, including all government-owned residentialcapital. Owner-occupied residential capital consists of housing occupied by private owners.

In the distributions of capital by type of owner, legal form of organization, and industry presented here, capital assets are classifiedon an ownership basis; that is, capital assets held under operating leases are recorded in the stock of the lessor, while capital assetsheld under capital leases are recorded in the stock of the lessee. The ownership basis is used in order to be consistent with theNIPA's and because the data necessary to compute capital stock estimates on a use basis are not available annually.

Estimates of fixed capital for the Federal Government are further classified by national defense and nondefense. National defensefixed capital consists of equipment and structures owned by the U.S. Department of Defense; it excludes family housing for thearmed forces, civil works construction by the Army Corps of Engineers, industrial facilities, military hospitals, and the Soldiers' andAirmen's Home. Nondefense fixed capital consists of all other fixed capital owned by the Federal Government.

Gross investment, depreciation, net stock, and average age of net stock

Gross investment is the value of purchases of new fixed capital assets. For a given type of owner, it also includes net purchases ofused assets from other types of owners (private business, governments, households, and nonresidents). Data are not available toadjust for transfers of used assets among industries or among legal forms of organization.

Depreciation is the decline in value due to wear and tear, obsolescence, accidental damage, and aging. For the estimatespresented here, most assets are assumed to have depreciation patterns that decline geometrically over time so that, for a given year,the depreciation charges on existing assets are obtained by multiplying the prior year's charge by one minus the annual depreciationrate.

Net stock is the value of fixed reproducible tangible wealth after adjustment for depreciation. With the perpetual inventory methodthat is used to derive the estimates presented here, the net stock in the historical-cost valuation and (at the deflation level) in thereal-cost valuation is calculated as the cumulative value of past gross investment less the cumulative value of past depreciation.Net stock in current-cost valuation is the value of the items in the real-cost net stock measured in the prices of the currentyearend.

Average age of net stock at a given yearend is a weighted average of the ages of all investment in the stock at that yearend. Theweight for each age is based on its value in the net stock.

Valuation of the estimates

The estimates of private net stocks and depreciation presented here are computed in historical-cost, real-cost, and current-costvaluations, using investment data in historical-cost and real-cost valuations. The average ages of net stocks are presented only forthe current-cost and historical-cost valuations. Estimates for government capital are presented on a similar basis except thatestimates of net stocks and depreciation are not presented in a historical-cost valuation.

Historical-cost valuation measures the value of fixed assets in the prices of the periods in which the assets were purchased new.

Real-cost valuation measures the value of these assets after the effects of price change have been removed. For this valuation,estimates for aggregate series are presented as chain-type quantity indexes, with 1992 equal to 100. These indexes are computedusing annual-weighted Fisher-type indexes to obtain year-to-year growth rates, which are chained together to obtain cumulativegrowth rates. Estimates for selected higher level aggregates are also presented in chained (1992) dollars.

Current-cost valuation measures the value of these assets in the prices of the given period, which are yearends for net stocks andannual averages for depreciation.

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