Measuring capital stock in the New Zealand economy - article

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Key Statistics - article, December 2000, p. 7-10

Measuring capital stock in the New Zealand economy¹

New Zealand’s net stock of fixed assets is estimated to have increased in value more than 17-fold between 1972 and 1997. The 1997 value was $274.8 billion, close to three times Gross Domestic Product for that year. The results are from the release of the first official capital stock series developed by Statistics New Zealand.

The measurement of capital stock for the New Zealand economy has arisen out of two fundamental needs underlying different aspects of economic analysis:

1. The need to measure national wealth through the development of balance sheets;
2. The need to understand and explain economic growth, which requires measures of productivity.

A key component for both is the value of tangible capital. For (1) this requires a wealth measure encompassing the assets included in the balance sheets, and for (2) it requires a measure of the ‘productive’ capital stock which allows quantification of the value of capital services.

While the two measures are different they are linked and derive from the same underlying capital formation data. Statistics New Zealand’s capital stock project has developed both measures and represents an important step in (a) the compilation of balance sheets and (b) providing an official measure of capital stock in productivity studies.

Coverage of the time series

The time series developed are for fixed assets only, covering buildings, infrastructure, transport equipment, machinery and other equipment and intangible assets owned by producers. Therefore assets included are those owned by businesses, central and local government, private non-profit organisations serving households and households themselves as the owner-occupiers of dwellings. The result is that all residential buildings are included in capital stock whether owned and occupied by householders or rented on a commercial basis. However, while transport and other equipment owned by businesses are included, the same assets when owned by householders as consumers are not.

Furthermore not all gross fixed capital formation results in an increase in fixed assets. The exception is gross fixed capital formation on major improvements to non-produced assets, such as land improvements. The improvements, once made, are deemed to be an inseparable part of the value of the land. Since this project measures capital stock for fixed assets, and not all assets; the measurement of net capital stock of fixed assets does not include the value of land improvements.

The project has developed two principal time series of capital stock, each by asset type and by industry. 
 

• Net capital stock in current (replacement) prices.
• Productive capital stock in constant prices.

In both cases the coverage of the estimates of capital stock and depreciation has been extended to include infrastructural assets and changes to the asset boundary in line with the revision to the international national accounting standard (System of National Accounts 1993).

The measurement of the capital stock series has entailed the development of the following:

1. Gross fixed capital formation by industry and asset type.
   These series were previously produced within the New Zealand System of National Accounts. However, they had not been updated since 1987, and the methodology was in need of a major review. As part of the capital stock project, the first requirement was to resurrect this series. The aim was to review the series introducing new sources and methods which would allow a more detailed industry analysis.
2. Depreciation by industry valued at replacement cost.
   The existing depreciation (consumption of fixed capital) estimates were based on valuations provided by respondents, as recorded in their financial accounts. These were based on a mix of both asset valuations, predominantly historical purchase price, and depreciation rates. The revised depreciation figures have been based on assets valued at current replacement cost and consistent rates of depreciation which better approximate the useful lives of assets.

This article presents some summary results for the net capital stock series, which are an essential precursor to the development of balance sheets and measures of national wealth.

Fixed assets in balance sheets

A balance sheet may be drawn up for institutional units, institutional sectors and the total economy. For the New Zealand economy as a whole, the balance sheet shows what is often referred to as national wealth, the sum of non-financial assets and net claims on the rest of the world.

A basic accounting identity links the opening balance sheet and the closing balance sheet for a given asset:

1. The value of the stock of a specific type of asset in the opening balance sheet, for example, aircraft owned by an airline; plus
2. The total value of the assets acquired, less the total value of those disposed of, in transactions that take place within the accounting period, for example, the purchase of a new plane and depreciation of both planes now owned; plus
3. The value of other positive or negative changes in the volume of the assets held for example, as a result of the discovery of a subsoil asset or the destruction of an asset as a result of war or a natural disaster, such as the loss of the first plane through an air accident; plus
4. The value of the positive or negative nominal holding gains accruing during the period resulting from a change in the price of the asset, for example, the cost of replacing planes has increased, requiring revaluation of the plane purchased in b); gives
5. The value of the stock of the asset in the closing balance sheet, for example, revalued, depreciated value of the plane purchased in b).

The existence of a set of balance sheets integrated with the flow accounts encourages analysts to look more broadly in monitoring and assessing economic and financial conditions and behaviour.

The summary results below present net capital stock by type of asset and by industry.
 

Summary results

Table 1 presents values of net capital stock by asset type while Table 2 presents values of net capital stock by industry. Net capital stock is the written-down value of gross capital stock.

The distinctions are as follows:

• Gross capital stock represents accumulated investment less the accumulated value of the assets no longer operating (that is, retired).
• Net capital stock represents accumulated investment less retirements and accumulated depreciation for assets still operating (that is, gross capital stock less accumulated depreciation on assets still in operation).

Consider the following example. A firm purchases two dump trucks for 1,000 units each. They have a life of 10 years and are depreciated at a rate of 100 units per year.
 
After five years, however, one of the trucks is removed from service. After five years, with no change in market prices, valuations would be:

• Gross capital stock: accumulated investment (2 x 1,000) less the accumulated value of the asset retired (1,000) gives a value of 2,000 - 1,000 = 1,000.
• Net capital stock: accumulated investment (2 x 1,000) less accumulated depreciation for the asset still operating (1,000 - 500) and for that retired (1,000) gives a value of 2,000 - (500 + 1,000) = 500.

It can be seen from Figure 1 that the main change in the asset composition of fixed capital stock has occurred for residential buildings, which grew from comprising 36 percent of total fixed assets in 1972 to 39.8 percent in 1987 and then 46.4 percent in 1997.

Almost all of this change in composition was brought about by price changes. In 1995/96 prices there is very little change in the composition of capital stock between 1987 and 1997. Residential buildings for example comprised 42.5 percent of total fixed assets in 1987, and 43.1 percent in 1997.

The Capital Goods Price Index for “Dwellings and Outbuildings” increased by 55 percent between March 1987 and March 1997. An “All Groups” Capital Goods Price Index was compiled from December 1989 onwards. This index grew by 12.1 percent between December 1989 and March 1997, compared with an increase in the index for Residential Buildings of 33.4 percent over the same period.

A full report, under the same title as this article, Measuring Capital Stock in the New Zealand Economy, outlining the conceptual framework, sources and methods and detailed results, is available from Statistics New Zealand.

Footnote

¹ This article was prepared by the National Accounts Division of Statistics New Zealand.

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