Consumption of fixed capital

14.22    Estimates of the capital stock of the Australian economy, together with the value of capital assets used up in the productive process (called depreciation in commercial accounting or consumption of fixed capital in the national accounts) and the flow of capital services to the productive process, are produced using an application of the Perpetual Inventory Method (PIM). Estimates of capital stock and capital consumption are calculated for all fixed assets that are owned by producers. These measures are expressed in current prices and also as chain volume measures.

14.23    Capital stock estimates provide information about the stock of capital available in an economy at a particular point in time. Three measures of capital stock can be distinguished: gross, net and productive.

1. The value of an economy's gross capital stock is obtained by valuing each asset in use at the current price of a new asset of the same type, regardless of the age of the asset. It is calculated as the accumulation of past investment flows less retirements at 30 June each year, before the deduction of any allowances for consumption of fixed capital.
2. Net (or economic) capital stock estimates are the written down values of an economy's gross capital stocks. They represent the net present values of the future capital services to be provided by the assets. The difference between the net and gross value of an asset is accumulated depreciation. Net capital stock is essentially a measure of wealth and is shown on an economy's balance sheet.
3. Productive capital stock estimates are derived by writing down each asset in accordance with its decline in efficiency due to age. If, for example, an asset is 75 per cent as efficient as a new asset of the same type, then the productive value of that asset is 75 per cent of the value of the new asset. Efficiency tends to decline with age, as older assets require more frequent and extensive maintenance and more replacement parts. Productive capital stock estimates are a measure of productive capacity and they form the basis for the measure of capital services required for productivity analyses.

14.24    Although the concepts of productive and economic capital are quite different they are intimately related: for any particular asset, given the real productive capital stock and a suitable discount rate we can determine the real economic (i.e. net) capital stock and, after reflation, the current price economic capital stock. The age-efficiency function (after being multiplied by a suitable scalar) defines how the flow of real capital services from an asset declines over an asset's life. The real economic value of an asset at any time can be calculated - given a discount rate - as the sum of discounted future real flows of capital services. Once the real economic values of an asset are determined over its lifespan an ageprice function can be derived. The age-price function defines how the net capital stock of an asset declines as it ages in real terms. Unlike net capital stock, productive capital stock is a concept that is really only applicable to the stock of a single type of asset. It is best aggregated over different types of assets by using rental prices as weights. The resulting aggregate is then used to produce a volume index of capital services.

14.25    The scope of capital stock is defined by the coverage of GFCF.