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Issue 16: Returns to Government Owned Assets Overview of AEG Recommendation and Comments J. Steven Landefeld April 25, 2006 SNA Update Session, Geneva, Switzerland AEG Recommendation The existing measure of government is a costbased measure that measures only part of the cost of government. The services of government capital includes the depreciation in the value of government-owned assets. It excludes the borrowing/opportunity costs associated with the public funds tied up in those governmentowned assets. The AEG has recommended that both components of the services of government capital be included. www.bea.gov 2 Motivation for Change The need to consistently measure the contribution and cost of government to the economy: The need to measure the contributions of government to economic and productivity growth. The need to consistently account for the returns to public and private fixed capital. The need to fully and consistently account for the costs of government. www.bea.gov 3 Motivation for Change Recommended measure is consistent with: The returns to private capital User Cost: What a renter would pay the owner private capital for the use of that capital. Service Value = Rent = Depreciation + rNS Contribution of Capital to Growth: The portion of profits associated the services of capital and their contribution to GDP growth. The full cost of government capital User Cost: What the economy foregoes for the use of government capital. Service Value = Depreciation + rNS Contribution to growth: The full cost of government capital and its contribution to GDP growth. www.bea.gov 4 Implementation Issues: What Rate? The rate that should be applied to the current/replacement value of a government asset should be a real rate. This will result in the appropriate nominal GDP estimate: Depreciation + rNS, where r = i-p Use of a nominal rate (which includes an inflation premium for the decline in the purchasing power of the face-value of the bond) and a current asset value (which is adjusted for inflation), will overstate the opportunity cost of the government asset when prices are increasing. www.bea.gov 5 Implementation Issues: What Rate? The real rate should be the expected real rate on government bonds. This can be estimated by an average of government bond rates over time less the average inflation rate over time. For countries with high inflation, or wanting a more exact estimate, the expression is: 1 nominal rate Real interest rate 1 1 inflation rate www.bea.gov 6 Implementation Issues: What Assets? What government assets? Fixed assets ― Yes Land and other assets ― No Current or replacement cost value of government fixed assets. www.bea.gov 7 Implementation Issues: Other Options For countries without capital stock estimates Use existing depreciation estimates. Use methodology used to generate depreciation estimates to develop approximate capital stocks and estimated rates of return to estimate services. Experience should aid in developing more sophisticated capital stocks recommended for full SNA system estimates. See OECD Manual, Measuring Capital, (2001) for more information. www.bea.gov 8 Appendix: Theory & Examples Capital services in the market can be seen in rental prices Owners rent out property at a rate to cover inflation, a normal return, and the depreciation on the rented asset Rental price also provides a “real” return to the owner Example assumptions: 3-year useful service life Asset price = Present value of expected benefits Asset price years of service left t 1 rental price 1 nominal interest rate Beginning-of-year flows (flows in current period are not discounted) www.bea.gov 9 Appendix Example ― Known Nominal Rental Values 1 nominal rate Real interest rate 1 1 inflation rate Given Rental price (current) Price index (expected inflation) Inflation rate (expected) Interest rate (nominal) Solve Beginning-of-period asset price (current prices) Rental price (constant prices) Beginning-of-period asset price (constant prices) Consumption of fixed capital (constant prices) Consumption of fixed capital (current prices) www.bea.gov Period 1 Period 2 Period 3 100 105 110 100 110 124 10.0 12.7 15.0 15.0 274.5 200.7 110.0 100.0 274.5 92.1 95.5 182.4 93.7 88.7 88.7 88.7 92.1 103.1 110.0 10 Appendix Example ― Solving for Capital Services Depreciation rate consumption of fixed capital beginning of period asset value Real interest rate User cost 92.1 0.335 274.5 1 0.15 1 0.045 1 0.10 real interest rate depreciation rate * current price of asset 1 real interest rate 0.045 0.335 User cost * 274.5 100 1.045 User cost equals rental cost at current prices www.bea.gov 11