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32. 1997 Economic Census
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.
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 stock adjusted for depreciation. Depreciation is the decline in value due to wear and tear, obsolescence, accidental damage, and aging. For business and government, in addition to its use in calculating net stocks, the same depreciationconsumption of fixed capitalis presented as part of the NIPA's. Consumption of fixed capital is a charge for the using up of fixed capital, and as such, it is, along with compensation of employees and other components of gross domestic income and gross national income, one of the costs incurred and the profits earned in the production of gross domestic product (GDP) and gross national product (GNP). Consumption of fixed capital is deducted from GDP and GNP to derive net domestic product and net national product. In addition, government consumption of fixed capital is a component of government consumption expenditures (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 which the stock estimates refer. For example, the yearend 1995 net stock estimate in current-cost valuation shows the assets that were in the stock at yearend 1995 expressed at the market prices prevailing for those assets at yearend 1995. The real-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 perpetual inventory method, which is based on the accumulation of investment flows. With this method, both the net stock and depreciation of any given type of asset is a weighted average of past investment in that asset. Specifically, the net stock is calculated as the cumulative value of past gross investment less the cumulative value of past depreciation. The initial calculations 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, which generally is the same level of detail as that presented in NIPA tables 5.7, 5.9, and 5.15, and real consumer purchases of durable goods, which generally is the same level of detail presented in NIPA table 2.7. At this detailed level, real investment in a given type of asset is obtained by dividing current-dollar investment in that type by the price index for new assets of that type, expressed as 1992=100, multiplied by 100. (Real investment for higher levels of detail shown in the NIPA 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. For a given year, the depreciation charges on existing assets are obtained by multiplying the prior year's charge by one minus the annual depreciation rate. For each type of asset, depreciation is cumulated over all vintages, and net stocks are estimated by 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 for higher level aggregates are then computed using the annual-weighted Fisher index. These rates are chained together to obtain cumulative growth rates, which in turn are used to obtain estimates of levels expressed as indexes (1992=100) and as chained (1992) dollars.
Current-cost estimates (in dollars) are obtained by "reflating" real estimates at the type-of-asset level. Depreciation is reflated to current cost using indexes that reflect average prices of new assets for the year; net stock is reflated to current cost using indexes of prices of new assets for the current yearend. Current-cost aggregates are obtained by directly summing current-cost estimates for the various types of assets. Finally, estimates by type of asset are adjusted for the net value of assets destroyed in wars and natural disasters.
The investment flows in new equipment and structures by type and the transfers of used assets used to implement the perpetual inventory method come from the revised NIPA's. For privately owned assets, investment by type of asset is distributed by industry and by legal form of organization, primarily through the use of data from BEA's benchmark input-output accounts for 1982 and 1987 and from the 1987 and 1992 Economic Censuses. These flows are modified to account for transfers of used assets between sectors of the economy. (Because of the lack of information, transfers of used assets 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 "depreciation profile." The new methodology for estimating depreciation uses depreciation profiles that reflect a geometric pattern and that replace the previously used profiles, which were based on straight-line depreciation and on assumed patterns of retirements. The depreciation profile for a given type of asset describes the pattern of how, in the absence of inflation, the price of an asset of that type declines as it ages. Although the profile for a given type of asset is assumed to be constant over time, different vintages of a given type of asset may have profiles that differ from those of other vintages of the same type of asset.
The new net stock and depreciation methodology uses depreciation profiles that are based on empirical evidence on used asset 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, and the appropriate rate of declining-balance depreciation was taken from empirical studies of similar classes of assets. The depreciation rates for specific types of assets were then determined by dividing the appropriate declining-balance rate for each asset by the asset's assumed service life. For autos and for computers and computer peripheral equipment, two classes of assets for which information on used asset prices makes it possible to estimate the underlying depreciation profiles, the actual empirical profiles were used. For computers and peripheral equipment, the profiles were taken from studies by Stephen Oliner. For missiles and nuclear fuel rods, depreciation was estimated using a straight-line pattern and a Winfrey 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 by BEA to derive the new estimates of net stocks and depreciation are shown in table A. Except as previously noted, BEA's depreciation rate equals the declining-balance rate divided by the service life. The rate of declining-balance depreciation is the multiple of the comparable straight-line rate used to calculate the geometric rate of depreciation. For example, a 1.65 declining-balance depreciation rate refers to a geometric rate of depreciation of 1.65/L, where L is the service life of the asset in years and 1/L is the straight-line rate. Separate service lives are used for each type of asset and for the estimates of fixed private capital; separate service lives are also used in different industries for certain types of assets. Most of the service lives are held constant over time because the information necessary to estimate changes in them is not available. The lives themselves are based on a wide variety of sources and for most types of assets, are the same as those used for the previously published estimates.
These tables are based on figures supplied by the United States Census Bureau, U.S. Department of Commerce and are subject to revision by the Census Bureau.
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