improved estimates of fixed reproducible tangible wealth ......improved estimates of fked...

May 1997 SURVEY OF CURRENT BUSINESS 69

Improved Estimates of Fked ReproducibleTangible Wealth, 1929-95By Arnold J. Katz and Shelby W. Herman

THIS ARTICLE presents revised estimates ofthe value of fixed reproducible tangible

wealth in the United States for 1929-95; theseestimates incorporate the definitional and sta-tistical improvements introduced in last year'scomprehensive revision of the national incomeand product accounts (NIPA'S) .' The most im-portant of these improvements in the wealthestimates, which cover the stock of privatelyowned and government-owned equipment andstructures and durable goods owned by con-sumers, is the use of an improved methodologyfor calculating depreciation.

The improved methodology uses empirical evi-dence on prices of used equipment and structuresin resale markets, which have shown that depre-ciation for most types of assets approximates ageometric pattern. Previously, the depreciationestimates were derived using straight-line depre-ciation and assumed patterns of retirements.2 For

1. The previously published estimates of fixed reproducible tangiblewealth ending in 1989 appeared in Fixed Reproducible Tangible Wealth in theUnited States, 1925-89. (Washington DC: U.S. Government Printing Office,1993). Revised estimates for the periods 1990-92 and 1991-93 appeared inthe September 1993 and August 1994 issues, respectively, of the SURVEY OFCURRENT BUSINESS.

2. The improved methodology for depreciation was summarized inRobert P. Parker and Jack E. Triplett, "Preview of the ComprehensiveRevision of the National Income and Product Accounts: Recognition ofGovernment Investment and Incorporation of a New Methodology for Cal-

Acknowledgments

The wealth estimates were prepared by the National Income and WealthDivision (NIWD) and the Government Division (GD). The estimates for the pri-vate sector were prepared under the direction of Shelby W. Herman, assistedby Michael Glenn; significant contributions were made by Kurt Kunze, JoyceNorthwood, Craig Hargenrader, Brooks Robinson, and Ernest Wilcox. Thegovernment estimates were prepared under the direction of Tim Dobbs, as-sisted by David Sullivan and Thae S. Park; significant contributions were madeby Jennifer Bennett, Joyce Northwood, Donald Peters, and Charles Robin-son. The chained-dollar estimates and indexes were prepared by MichaelBoehm, under the direction of Christian Ehemann. Alexie Malcolm providedgeneral programming assistance. Duane Hackmann prepared the tables fortypesetting. Overall supervision was provided by Gerald F. Donahoe, formerAssociate Director for National Income, Expenditures, and Wealth Accounts,Leon W. Taub, Chief of NIWD, and Karl Galbraith, Chief of GD.

equipment, the new depreciation rates are fasterthan the old ones in the early years of an asset'slife and slower in the later years. For structures,the new rates are slower throughout an asset'slife. As a result, the revisions to depreciationand to the net stocks of equipment are relativelysmall, and the revisions to depreciation and tothe net stocks of structures are relatively large;depreciation is lower and net stocks are higher.

The first section of the article describes themethodology for estimating net stocks and de-preciation and provides a table of the newdepreciation rates and services lives by type ofasset. The second section discusses the effects ofthe new methodology for depreciation and otherimprovements to the estimates of net stock. Sum-mary tables of revised estimates of reproducibletangible wealth are presented at the end of thearticle.

The improved depreciation estimates presen-ted in this article also are incorporated into therevised NIPA estimates of consumption of fixedcapital and related series beginning with 1929that appear elsewhere in this issue of the SURVEY.However, there are two fundamental differencesbetween the two series. First, government con-sumption of fixed capital in the NIPA'S differsfrom depreciation of fixed tangible reproduciblewealth owned by government, because NIPA de-preciation does not include the adjustments madeto general government capital for natural dis-asters and war losses. Second, depreciation onpurchases of durable goods by consumers are notrecorded in the NIPA'S, because such purchasesare treated as consumption, not as investment.

A complete set of BEA wealth estimates for theyears through 1994 will be available in Fixed Re-producible Tangible Wealth in the United States,1925-94, which will be published later this year.

dilating Depreciation" SURVEY 75 (September 1995). The empirical andtheoretical literature supporting BEA'S use of geometric patterns and the selec-tion of specific depreciation rates will be described in a forthcoming SURVEYarticle by Barbara Fraumeni, Professor of Economics at Northeastern Uni-versity, who served as a consultant to BEA for this project. The previouslyused methodology was described in Fixed Reproducible Tangible Wealth.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

May 1997

70 • May 1997 SURVEY OF CURRENT BUSINESS

(See the box "Availability of Data") This publi-cation will present annual estimates of net stocksand depreciation in historical-cost, real-cost, andcurrent-cost valuations for the types of assetsshown in tables 1-15 in this article, for private as-sets by industry and legal form of organization,and for government assets by type of equipmentand structures; it will also provide the average ageof net stocks, the investment data used to derivethe wealth estimates, and a detailed statement ofthe methodology underlying the estimates.

Methodology for Net Stocks andDepreciation

The primary measure of the value of fixed repro-ducible tangible wealth is the net stock, that is,the value of the stock adjusted for depreciation.Depreciation is the decline in value due to wearand tear, obsolescence, accidental damage, andaging. For business and government, in addi-tion to its use in calculating net stocks, the samedepreciation—consumption of fixed capital—ispresented as part of the NiPA's.3 Consumption offixed capital is a charge for the using up of fixedcapital, and as such, it is, along with compensa-tion of employees and other components of grossdomestic income and gross national income, oneof the costs incurred and the profits earned inthe production of gross domestic product (GDP)and gross national product (GNP). Consumptionof fixed capital is deducted from GDP and GNPto derive net domestic product and net nationalproduct. In addition, government consumptionof fixed capital is a component of governmentconsumption expenditures (and GDP) as a meas-ure of the value of the services of governmentfixed assets.4

The net stock estimates in this article are pres-ented in terms of two valuations—current costand real cost. Current-cost (or "replacement-cost") valuation expresses all assets in the netstock in terms of the prices that prevailed in theperiod to which the stock estimates refer. Forexample, the yearend 1995 net stock estimate incurrent-cost valuation shows the assets that werein the stock at yearend 1995 expressed at the mar-ket prices prevailing for those assets at yearend

3. Prior to the recent comprehensive revision, government purchases offixed assets were not classified as investment in the NIPA'S; all such governmentpurchases were classified as consumption expenditures. Consequently, theNIPA'S did not include depreciation of government assets.

4. It should be noted that consumption of fixed capital does not providean estimate of the full value of the services of government fixed assets, becausethe net rate of return on these assets is assumed to be zero. See Parker andTriplett, "Preview of the Comprehensive Revision," 36.

1995.5 The real-cost estimates are expressed eitheras quantity indexes or in "real" dollars, with 1992as the base period.

Overview of methodology

Estimates of net stock and depreciation—underboth the new and old methodologies—are de-rived using the perpetual inventory method,which is based on the accumulation of invest-ment flows.6 With this method, both the netstock and depreciation of any given type of assetis a weighted average of past investment in thatasset. Specifically, the net stock is calculated asthe cumulative value of past gross investment lessthe cumulative value of past depreciation. Theinitial calculations are performed in real terms;cur rent-dollar values are estimated by reflation.

Calculations of net stocks and depreciation arebased on real investment data at the type-of-assetlevel of detail, which generally is the same levelof detail as that presented in NIPA tables 5.7, 5.9,and 5.15, and real consumer purchases of durablegoods, which generally is the same level of detailpresented in NIPA table 2.7. At this detailed level,real investment in a given type of asset is obtainedby dividing current-dollar investment in that typeby the price index for new assets of that type,expressed as 1992=100, multiplied by 100. (Realinvestment for higher levels of detail shown in theNIPA tables is calculated using BEA'S chain-typeannual-weighted indexes.)

Under the new methodology, most assets areassumed to have depreciation patterns that de-cline geometrically over time. For a given year,the depreciation charges on existing assets are ob-tained by multiplying the prior year's charge byone minus the annual depreciation rate.7 Foreach type of asset, depreciation is cumulated overall vintages, and net stocks are estimated by sub-tracting cumulative depreciation from cumulativegross investment.

As is the case for real investment, year-to-yeargrowth rates for both depreciation and net stocks

5. The yearend price for a given type of asset is estimated as the averageof the price for the fourth quarter of the given year and the price for the firstquarter of the subsequent year. For periods prior to 1959, yearend prices areestimated as the average of the price for the given year and the price for thesubsequent year.

6. An alternative to the perpetual inventory method is to use data onthe number of units of each type of asset in the net stock. This methodwas used for autos because the number of units in the stock of each vintageis available from registration data. For all other assets, methods based ondirect measurement of the capital stock were not used because of the limitedavailability of the required data. Stock data are usually stated as book values,which do not provide the detailed information about the vintages or typesof assets necessary to derive stock estimates on a current-cost and a real-costbasis.

7. New assets are assumed, on average, to be placed in service at midyear,so that depreciation on them is equal to one-half the new investment timesthe depreciation rate.


May 1997

SURVEY OF CURRENT BUSINESS May 1997 • 71

on a real-cost basis for higher level aggregates arethen computed using the annual-weighted Fisherindex. These rates are chained together to obtaincumulative growth rates, which in turn are usedto obtain estimates of levels expressed as indexes(1992=100) and as chained (1992) dollars.8

Current-cost estimates (in dollars) are obtainedby "reflating'' real estimates at the type-of-assetlevel. Depreciation is reflated to current costusing indexes that reflect average prices of newassets for the year; net stock is reflated to cur-rent cost using indexes of prices of new assets forthe current yearend. Current-cost aggregates areobtained by directly summing current-cost esti-mates for the various types of assets. Finally,estimates by type of asset are adjusted for thenet value of assets destroyed in wars and naturaldisasters.

Investment flows

The investment flows in new equipment andstructures by type and the transfers of used as-sets used to implement the perpetual inventorymethod come from the revised NIPA'S. For pri-vately owned assets, investment by type of assetis distributed by industry and by legal formof organization, primarily through the use ofdata from BEA'S benchmark input-output ac-counts for 1982 and 1987 and from the 1987and 1992 Economic Censuses. These flows aremodified to account for transfers of used assetsbetween sectors of the economy. (Because ofthe lack of information, transfers of used assetswithin sectors are not accounted for in the wealthestimates.)

Depreciation patterns and depreciation profiles

In the perpetual inventory method, the patternof depreciation charges for a given asset is de-termined by its "depreciation profile." The newmethodology for estimating depreciation uses de-preciation profiles that reflect a geometric patternand that replace the previously used profiles,which were based on straight-line depreciationand on assumed patterns of retirements.9 Thedepreciation profile for a given type of asset de-scribes the pattern of how, in the absence ofinflation, the price of an asset of that type de-clines as it ages. Although the profile for a giventype of asset is assumed to be constant over

time, different vintages of a given type of assetmay have profiles that differ from those of othervintages of the same type of asset.

The new net stock and depreciation method-ology uses depreciation profiles that are basedon empirical evidence on used asset prices. Ide-ally, the profiles for each type of asset should beestimated using prices for used assets in resalemarkets, but such studies have only been con-ducted for some types of assets. However, theavailable studies suggest that, in general, depreci-ation profiles are more closely approximated bya geometric pattern of price declines than by astraight-line pattern. Consequently, in the re-vised estimates, the depreciation profiles for mostassets were assumed to be strictly geometric, andthe appropriate rate of declining-balance depreci-ation was taken from empirical studies of similarclasses of assets. The depreciation rates for spe-cific types of assets were then determined bydividing the appropriate declining-balance ratefor each asset by the asset's assumed servicelife. For autos and for computers and computerperipheral equipment, two classes of assets forwhich information on used asset prices makesit possible to estimate the underlying deprecia-tion profiles, the actual empirical profiles wereused. For computers and peripheral equipment,the profiles were taken from studies by StephenOliner.10 For missiles and nuclear fuel rods,depreciation was estimated using a straight-linepattern and a Winfrey retirement pattern, whichis essentially a bell-shaped curve.

The new geometric depreciation rates and theassociated declining-balance depreciation ratesand service lives used by BEA to derive the new es-timates of net stocks and depreciation are shownin table A. Except as previously noted, BEA'Sdepreciation rate equals the declining-balancerate divided by the service life. The rate ofdeclining-balance depreciation is the multiple ofthe comparable straight-line rate used to calculatethe geometric rate of depreciation. For example,a 1.65 declining-balance depreciation rate refers toa geometric rate of depreciation of 1.65/1, whereL is the service life of the asset in years and i/Lis the straight-line rate. Separate service lives areused for each type of asset and for the estimatesof fixed private capital; separate service lives arealso used in different industries for certain types

8. For a discussion of BEA'S chain-type measures of output and prices, see"BEA'S Chain Indexes, Time Series, and Measures of Long-Term EconomicGrowth" in this issue.

9. For a description of the previously used methodology, see FixedReproducible Tangible Wealth.

10. A general description of this work appears in Stephen D. Oliner, "PriceChange, Depreciation, and Retirement of Mainframe Computers/' in PriceMeasurements and Their Uses, Studies in Income and Wealth vol. 57, edited byMurray F. Foss, Marilyn E. Manser, and Allan H. Young (Chicago: Universityof Chicago Press, for the National Bureau of Economic Research, 1993): 19-61. The depreciation profiles used by BEA were taken from that article andfrom unpublished detail provided by Oliner.


May 1997

J2 • May 1997 SURVEY OF CURRENT BUSINESS

Table A.—BEA Depreciation Rates, Service Lives, and Declining-Balances Rates

Type of asset

Private nonresidential equipmentOffice, computing, and accounting machinery1:

Years before 19781978 and later years

Communications equipment*Business servicesOther industries

InstrumentsPhotocopy and related equipmentNuclear fuel2Other fabricated metal productsSteam engines and turbinesInternal combustion enginesMetalworking machinery3

Special industrial machinery, n.e.cGeneral industrial including materials handling equipmentElectrical transmission, distribution, and industrial apparatus

I flpfll and intprnrhan ns^Rnnpr transitTruckino and warehousino* and auto reoair services and oarkinoOther industries

Autos4

Aircraft:Transportation by air.depository institutions.and business services:

Years before 19601960 and later years . . .

Other industries:Years before 19601960 and later years . . . . .

Ships and boats -.Railroad equipmentHousehold furniture and fixturesOther furniture

Construction tractorsAgricultural machinery, except tractors

Minino and oil field machineryService industry machinery:

Wholesale and retail tradeOther industries

Household appliancesOther electrical eauiomentOther .„!...!.

Private nonresidential structuresIndustrial buildingsMobile officesOffice buildingsCommercial warehousesOther commercial buildingsReligious buildingsEducational buildingsHospital and institutional buildingsHotels and motels . .Amusement and recreational buildingsAll other nonfarm buildingsRailroad replacement trackOther railroad structuresTelecommunicationsElectric light and power:

Years before 1946

GasPetroleum Dioelines1 Wtl WIWWIII flfWIIIIWW

FarmMinino exploration shafts and wells*

Petroleum and natural oas*Years before 19731973 and later years

OtherLocal transit . . .Other

Residential capital (private and government)1-to-4-unit structures-new1-to-4-unit structures-additions and alterations1-to-4-unit structures-major replacements5-or-more-unit structures-new5-or-more-unit structures-additions and alterations5-or-more-unit structures-major replacementsMobile homesOther structuresEquipment . . . .

Durable goods owned by consumersFurniture including mattresses and bedspringsKitchen and other household appliancesChina, glassware, tableware, and utensilsOther durable house furnishings

Depre-ciationrates

027293119

.1500110013501800

.0917

.0516

.20631225

.10311072

.0500

•J9Q917251917

.10310825

.13751100

.0611

.0589

.137511 701/C9•jcoq

.1179-tccn

1500

16501500.1640.1834.1473

.03140556.0247.02220262.0188.0188.0188.0281.0300.0249.0275.0166.0237

n9T70911ny>7

02370239

056307510450.0237.0225

01140227.03640140.028404550455.0227.1500

1179.15001650.1650

Serv-ice life(years)

97

111512g4

18328

16161633

1410g

1620

1215272812

14m11

1011109

11

3116364034484848323038385440

Af\

AC

At]

4038

1612203840

804025653220204011

14111010

Declin-ing-bal-ancerates

2 18322 1832

1.65001 65001 620316203

1.6500165001.65001 96001.65001 71501.6500

1 7959

1 72521 7252

1.650016500

1.65001 65001.65001.65001.65001 (\C\C\f\

1 *}fifiA1 "viAd.1.65001 54Qft

1 6500

1 65001 65001.65001.65001.6230

.97478892.8892.88928892.9024.9024.90248990.8990.9480.9480.9480.9480

QARflQAon

QAftf)

94809100

900890089008.8990.8990

91009100.91009100.9100910091009100

1.6500

1 650016500165001.6500

Type of asset

Video and audio products, computers and peripheral equipment, andmusical instruments ]

Jewelry and watchesOphthalmic products and orthopedic appliancesBooks and mapsWheel goods, sports and photographic equipment, boats, and pleasure

Autos4

Other motor vehiclesTires tubes accessories and other parts

Government nonresidential equipmentFederal:

National defense:Aircraft:

Airframes:BombersF-14typeAttack F-15 and F-16 typesF-18 typeElectronic warfareCargo and trainersHelicopters

EnainesOther

Years before 19821982 and later vears

MieoilAO* 5Missiles.StrateoicTacticalTorpedoesFire control equipmentSpace programs

Ships:Surface shipsSubmarines . . .Government furnished equipment:

ElectricalPropulsionHull, mechanicalOrdnanceOther

Vehicles:Tanks, armored personnel carriers, and other combat vehiclesNoncombat vehicles:

TrucksAutos6

Other . . .Electronic eouioment*

Computers and peripheral equipment7Electronic countermeasures

OtherOther equipment:

MedicalConstruction

Ammunition plant *

Weapons and fire controlGeneralOther

Nondefense:General government:

Computers and peripheral equipment7Aerospace equipmentVehiclesOther

Enterprises:U.S. Postal Service:

Computers and peripheral equipment7VehiclesOther

Tennessee Valley Power AuthorityBonneville Power Authority . . .Other

State and local:Power tools, lawn and garden equipmentMiscellaneous metal productsAgricultural machinery and equipmentConstruction machinery and equipmentMetalworking machinery and equipmentGeneral purpose machinery and equipment . . .Special industry machinery and equipment .Integrating and measuring instrumentsMotors, generators, motor generator setsSwitchoear and switchboard eauiDment

Depre-ciationrates

.1833

.1500

.2750

.1650

.1650

23166177

.0660

.0868

.0825

.1100

.0717

.0660

.08252750

.11791RRH

.0550

.0660

.1834

.0825

.0660

.16501650

.0825

2875

2465

23571650

1834.1550noi7.0868•joyc

.1375

.1650

.1375

.1100

.4533

.1650

.32381100.05000500.0660

1650091718331650103115001500.13750516.0500


g116

10

10

83

251920152325206

1410

2015151020

3025

920251010

20

6

7

710

g10is1919

121012

155

10

715333325

1018g

10161111123233


1.65001.65001.65001.6500

1.6500

185301 8530

1.65001.65001.65001.65001.65001.65001.65001 6500

1.65001 6500

1.65001.6500

1.65001.65001.65001.65001 6500

1.6500

1 7252

17252

1 65001 6500

1 65001.54981 fibrin1.65001 fi^nn1.65001.65001.6500

1.65002.26641.6500

2.26641650016500165001.6500

165001 65001 65001 6500165001 65001 6500165001 65001.6500


May 1997


of assets. Most of the service lives are held con-stant over time because the information necessaryto estimate changes in them is not available. Thelives themselves are based on a wide variety ofsources and for most types of assets, are thesame as those used for the previously publishedestimates.11

Comparison With the PreviousMethodology

The new methodology for net stocks and depre-ciation differs from the previous one in severalimportant respects. As noted earlier, depreci-ation patterns had previously been assumed tofollow a straight-line pattern with service livesdistributed about the mean of assumed retire-ment patterns. Destruction of government assetsin wars and natural disasters has been accountedfor differently. In addition, estimates of grossstocks of fixed capital are no longer prepared,and aggregate series are now prepared usingBEA'S newly featured chain-type annual-weightedindexes rather than fixed-weighted (Laspeyres)indexes.

The remainder of this section provides addi-tional information on these changes in method-ology and describes the revisions to net stocks ofprivate and government assets.

n. In the new estimates, State and local government equipment are as-signed the same service lives as those assigned to privately owned assets ofthe same type. Previously, all State and local government equipment wasassigned a single service life. Using information obtained from the Depart-ment of Defense, service lives for military equipment are also assigned ata finer level of detail than in the past. For a complete description of thedata sources previously used to estimate service lives, see fixed ReproducibleTangible Wealth, M-i6 to M-i8.

Depreciation profiles

Previously, all assets were assumed to have de-preciation profiles that declined to zero in astraight-line manner. However, all assets of agiven type were not assumed to have the samelife. Instead, each vintage of a given type of assetwas divided into several dozen cohorts, each ofwhich was assumed to have a different service life.These lives were assumed to be distributed aboutthe mean according to one of several Winfrey re-tirement patterns. Consequently, the net stockof an entire vintage of assets of a given type de-clined over time in a manner that was somewhatmore accelerated than that given by the simplestraight-line pattern.

The differences between the typical depreci-ation profiles used in the previous and newmethodologies are illustrated in charts i and 2.The comparison is made for a typical type ofequipment in chart i and for a typical type ofstructure in chart 2; both charts are for an en-tire vintage of investment in these types. Inchart i, the equipment is assumed to have amean service life of 15 years. (All three ofthe depreciation profiles shown on the chartassume this mean life, though the profile forstrict straight-line depreciation would be appro-priate only if all assets in the vintage had a15-year life.) Because of the use of the Winfreypattern, the depreciation profile in the previ-ous methodology is seen to be slightly moreaccelerated than the curve for strict straight-line depreciation (that is, below it) except inthe last few years of the asset's life. A de-preciation profile is also shown on chart i for

Table A.—BEA Depreciation Rates, Service Lives, and Declining-Balances Rates—Continued

Type of asset

Electronic components and accessoriesMiscellaneous electrical machineryCalculating and accounting machinesTypewritersComputers and peripheral equipment7

Machine shop productsWood commercial furnitureMetal commercial furnitureHousehold appliancesHome electronic equipmentMotor vehiclesMotorcycles .

Railroad equipment ... . . . . . 'Sporting and athletic goodsPnotographic and photocopying equipmentMobile classrooms, mobile offices, etc

Depre-ciationrates

1833.1375.2357.2357

.2063

.1179

.1179

.1500

.1500

.1650

.1650

.1100

.0590

.1650

.1650

.1650


91277

81414111110101528101010


165001.65001.65001.6500

i.65001.65001.65001.65001.65001.65001.65001.65001.65001.65001.65001.6500

Type of asset

Musical instrumentsOther equipment

Government nonresidential structuresFederal State and local*

National defense*Buildinos'

IndustrialEducational .Hospital .Other

Nonbuildings*Highways and streetsConservation and development . .Sewer systems -Water systemsOther

Srates

.1834

.1375

.0285

.0182

.0182

.0162

0152.0152.0112Jt@2.(US'

Serv-ice lifeiparsl

912

32505050

606060606©


1.65001.6500

.91009100.9100.9100

9100.9100.9100.9100.9100

1. The depreciation rate for this type of asset is not used for computers and peripheral equipment. Depreciationrates for these assets are taken from Oliner as described in the text of the article.

2. The depreciation rates for nuclear fuel are based on a straight-line rate pattern and a Winfrey retirement pat-tern.

3. The service life listed is the average for nonmanufacturing industries; the service lives used for manufacturingindustries differ by industry.

4. The depreciation rates for autos are derived from data on new and used auto prices.5. Depreciation rates for missiles are based on straight-line patterns of depreciation and Winfrey retirement pat-

terns.6. Depreciation rates for government-owned autos are derived from data on autos that are privately owned.7. Depreciation rates for these assets are taken from Oliner as described in the text of the article.


May 1997

74 • May 1997 SURVEY OF CURRENT BUSINESS

1.65 declining-balance depreciation, a declining-balance rate that is used for many types ofequipment in the new methodology. In the first10 years of the profile, this depreciation profileis more accelerated than the one in the pre-vious methodology. In later years, the profilein the new methodology yields higher values ofthe vintage.

For structures, the differences between the pre-vious and new depreciation profiles are substan-tial in all years. Chart 2 illustrates the aggregatedepreciation profile for a vintage of structuresthat has an average service life of 36 years andthat in the new methodology is depreciated usinga 0.9 declining-balance depreciation rate. Withthe previous methodology, 56 years after the ini-tial investment, the entire vintage has been fullydepreciated and has a value of zero. With thenew methodology, after 56 years, the vintage re-tains 25 percent of its initial value, and after 112years, it retains more than 5 percent of its ini-tial value. Thus, for example, nearly all the officebuildings that were constructed in 1887 have beentorn down or otherwise destroyed (their averageservice life is 36 years), but the new depreciationpattern assumes that about 6 percent of the ini-tial value of all such construction is still in thenet stock. However, the effect of this assumptionis minimal: Because of the substantial growth ininvestment in office buildings, the value of thisvintage of construction constitutes less than o.oi

percent of the total value of the current net stockof office buildings.

Gross stock estimates

The previous methodology used to calculate netstocks and depreciation allowed BEA to preparetwo other "wealth" measures—gross stocks anddiscards. Gross stocks are the cumulative value,not adjusted for depreciation, of past investmentstill in existence—that is, the value of past in-vestments less the cumulative value of investmentthat has been discarded or retired. The esti-mation of gross stocks and discards requires amethodology that assigns a specific service life toeach of the assets distributed around the meanservice life used by BEA. The new methodologyuses a depreciation profile that is applied to allinvestment in a given cohort, and thus consistentdata are not available on discards for each of thediscrete service lives for investment within thecohort. As a result, BEA is no longer producingestimates of gross stock and discards.

Destruction of assets

In the new net stock estimates, the value of as-sets in the general government sector is writtendown to reflect the destruction of military assetsduring wars. (As previously noted, these write-downs are included in depreciation in the wealthestimates but excluded from the consumption of

CHART 1 CHART 2

Typical Depreciation Profiles for equipment•<€i- * '«.—., * <• W .>.;>. /'«^ :>• ;»;»>i""-"< , - " • *

Percent of real value:

100 1.65-Declining balance depreciationStraight-line depreciation

— Straight-line depreciationandVyinfrey.pattern

Typical Depreciation Profiles for Structuresisrttt^

,, Percent of real value >180 0.9-Dedining balance depreciation

Straight-line depreciationStraight-line depreciation

MlWinfreyDattern.

rtofC^

40

20

0 12 24 ;36 40 80 725 84Yearn sf&r initialjnwstor

U.S.DepartmentofCommer< ,̂ Bureau of Economic Analysis


May 1997


fixed capital in the NIPA'S in order to avoid in-creasing the value of the output of governmentservices, which is measured by consumption offixed capital, when there is war damage. Inthe previous methodology, service lives of mil-itary equipment were shortened during wars toaccount for their destruction.)

Calculation of real estimates

BEA'S improved method of calculating real outputand prices also improves the measures of aggre-gate stocks and depreciation. Before the recentcomprehensive revision, BEA featured estimatesof real GDP and its components valued in termsof a single base period (fixed weights), whichresulted in "constant-dollar" estimates. Now,BEA features estimates derived using chain-typeannual-weighted indexes; these indexes also areused for the improved estimates of real net stocksand depreciation.12

The new chain-type measures allow for theeffects of changes in relative prices and in thecomposition of output over time and therebyeliminate a major source of bias in the previouslyfeatured fixed-weighted, or Laspeyres, measuresof real GDP and prices. As described in thearticle "BEA'S Chain Indexes, Time Series, andMeasures of Long-Term Economic Growth" inthis issue, the new indexes are more accurate,but they are also computationally more complexthan the fixed-weighted indexes that convertedto "constant-dollar" estimates that were additiveand therefore easily manipulated. The new in-

12. Estimates will no longer be published in fixed-weighted dollars, butwill be made available on the Department of Commerce's Economic BulletinBoard.

Table B.-Real Net Stock of Fixed Reproducible TangibleWealth: Revisions to Average Annual Rates of ChangeOver Selected Periods

[Percent]

1929-94

Previously publishedRevisedRevision

1929-69


1959-94


Total

2.628

.2

2.02.4

.4

3.13.1o

Pro-ducers'durableequip-ment

3.436

.2

2.72.8

.1

4.04.3

.3

Non-resi-

dentialstruc-tures

1.71 9.2

.3

.9

.6

3.02.7-.3

Resi-dential

2.325.2

1.71.9.2

2.92.9o

Gov-ern-ment

3.13.5

.4

4.25.0.8

2.22.3

1

Dura-ble

goodsowned

bycon-

sumers

4.041.1

3.03.3

.3

4.84.9.1

dexes have been converted to "chained (1992)dollar" estimates; however, as BEA pointed outwhen these estimates were introduced, they arenot additive and may work well only for periodsclose to the base period. Moreover, calcula-tions of contributions to the growth of aggregatemeasures, such as total private nonresidential netstock, may produce increasingly misleading re-sults as one moves away from the base year.Consequently, BEA will present chained (1992)dollar estimates of selected aggregate measures(see table 15) beginning with 1929 and chained(1992) dollar estimates for all measures beginningwith 1982. (Chain indexes will be presented forall periods.) For users who rely on chained (1992)dollar estimates, a note accompanying the chain-index article demonstrates how to prepare closeapproximations of contributions to real growthor relative changes for any period.

Comparison with previously published estimates

The overall effects of the changes in methodologycan be gauged by comparing the new estimatesof the major components of fixed reproducibletangible wealth with the previously published es-timates. In table B, this comparison is madefor growth rates of the "real" measures of netstock. Except for the growth rate for governmentnet stock, which is revised up from an aver-age annual increase of 3.1 percent to 3.5 percent,the changes in methodology resulted in relativelysmall revisions to growth rates for 1929-94.

Table C.-Net Stock of Fixed Reproducible Tangible Wealthfor Selected Years

[Billions of dollars]

1929

Previously publishedRevisedRevisionRevision as a percentage

of previously published

1959

Previously publishedRevisedRevisionRevision as a percentage


1994Previously publishedRevisedRevision .Revision as a percentage


Total

279.4331.2

51.8

18.5

1,328.01,620.9

292.9

22.1

17,647.221,603.33,955.0

22.4

Pro-ducers'durableequip-ment

32.334.42.1

6.5

186.2187.6

1.4

.8

2,800.22,863.3

63.1

2.3

Non-resi-

dentialstruc-tures

73.7100.226.5

36.0

225.5364.6139.0

61.7

3,260.64,704.11,443.5

44.3

Resi-rlontiflluuiuiai

97.3118.821.6

22.2

408.8524.4115.6

28.3

5,856.47,412.61 ,556.1

26.6

Gov-ern-ment

37.441.54.1

11.1

318.5377.4

58.9

18.5

3,240.34,389.11,148.8

35.5

Dura-ble

goodsowned

bycon-

sumers

38.836.2-2.6

-6.8

189.0166.9-22.1

-11.7

2,490.82,234.2-256.6

-10.3


May 1997

76 • May i^7 SURVEY OF CURRENT BUSINESS

In table C, current-dollar levels are comparedfor selected years. The revisions to the levelsof producers' durable equipment and consumerdurable goods were relatively small (revisionsto consumer durable goods were largely dueto revisions to the depreciation rates for au-tos). The revisions to the levels of net stocks ofnonresidential structures, residential capital, andgovernment capital were large. For example, therevisions raised the levels of these three aggre-gates 44.3 percent, 26.6 percent, and 35.2 percent,respectively, over the previously published levelsfor 1994. These large increases primarily reflectthe new depreciation patterns for structures.

Presentation of the revised estimates

Tables 1-15 present the revised estimates of fixedreproducible tangible wealth. The odd-numberedtables (except table 15) present current-cost esti-mates in dollars and the even-numbered tablespresent real-cost estimates in terms of chain-typeannual-weighted quantity indexes that are setequal to 100 in 1992. Tables i and 2 present esti-mates for total fixed reproducible tangible wealthand its major components for 1929-95. Tables 3and 4 present estimates for fixed private capitalby detailed type of asset for 1959-95. For the pe-riod 1985-95, estimates for fixed private capital

are shown in tables 5 and 6; fixed nonresidentialprivate capital, in tables 7 and 8; residential cap-ital, in tables 9 and 10; government-owned capi-tal, in tables 11 and 12; and durable goods ownedby consumers, in tables 13 and 14. Table 15presents the same chained (1992) dollar estimatesfor total fixed reproducible tangible wealth andits major components comparable as in table 2.

Future Work

The release of these improved estimates of netstock and depreciation represents a major stepforward, but much work remains. As noted inBEA'S Mid-Decade Strategic Review, BEA plans toconduct empirical studies of used asset prices formore assets.13 In addition, such studies will beconducted so that information on the quality dif-ferences between vintages of assets reflected inBEA'S prices of investment goods is accounted forin estimating depreciation profiles, as reflected inthe profiles for computers. In addition, BEA plansto update service lives and to develop depreci-ation rates that are appropriate for governmentassets.

Tables i through 15 follow. £3

13. For a detailed description of the strategic plan, see "Mid-DecadeStrategic Review of BEA'S Economic Accounts: An Update" in the April 1995SURVEY.

Data Availability

The historical data for the tables at the end of this article are available fromthe Commerce Department's STAT-USA on the Economic Bulletin Board andthe Internet; for subscription information, call (202) 482-1986. The industryestimates (tables 5 and 6) begin with 1947; the estimates in the other tablesbegin with 1929. Additional estimates will be made available in June, includingannual estimates of net stocks and depreciation using historical-cost, real-cost,and current-cost valuations for the following: The types of assets shown inthis article; private assets by industry and legal form; and government assetsby type of equipment and structure. The investment data used to derive theseestimates and the average age of net stocks will be available in early fall.

Also this fall, BEA will publish Fixed Reproducible Tangible Wealth in theUnited States, 1925-94, which will include revisions for 1993-94 from this year'sannual NIPA revision. A CD-ROM will also be made available; it will containthese estimates as well as the underlying detail, including the fixed-cost dataused to prepare the current-cost valuations. The availability of the volumeand the CD-ROM will be announced in the SURVEY.


May 1997

improved estimates of fixed reproducible tangible wealth ......improved estimates of fked...

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