1 Consists of social services, membership organizations, and miscellaneous professional services.

Source: U.S. Bureau of Economic Analysis, Fixed Reproducible Tangible Wealth, 1925-95; and Survey of Current Business, April 2000.

http://www.bea.doc.gov/bea/dn2.htm

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 1992 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 1992=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 (1992=100) and aschained (1992) 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.