Measuring Capital and Multifactor Productivity: The Role of Asset Depreciation and Initial Capital Stock Estimates

This paper suggests a meaningful way to compare how the depreciation and retirement of assets are estimated in the national accounts of different countries and shows large differences. Applying the same assumptions in the US as in other G7 countries would reduce the US net capital stock by up to 1/3 and increase US GDP by up to 0.5 per cent. The growth rates of capital services and MFP would be less affected. This paper also considers two commonly used methods to estimate initial capital stocks and the impact they may have on measured capital and MFP. They assume that either investment growth rates or capital-stock-to-output ratios are constant over time. The first one is misleading because it fails to account for trends and fluctuations in real-estate investment. The second one works well for the US but may be less reliable for other countries. Overall, this paper calls for a more frequent review of asset depreciation patterns by statistical agencies, and for extending investment series to the maximum extent before relying on crude methods to estimate initial capital stocks.