Consumption of fixed capital and capital services

14.26    Two flow concepts are relevant to capital stocks:

1. Consumption of fixed capital (COFC) represents the value of a capital asset that is 'used up' in a particular period. The real consumption of fixed capital of an asset in a period is the difference in the real economic value of the asset at the beginning of the period and at the end of the period. Consumption of fixed capital is based on the concept of the expected economic lifetime of an asset and is designed to cover the loss in value due to normal wear and tear, foreseen obsolescence, and the normal amount of accidental damage which is not made good by repair. Unforeseen obsolescence is treated as a capital loss rather than as consumption of fixed capital.
2. Capital services reflect the amount of 'service' each asset provides during a period. For each asset, the services provided in a period are directly proportional to the asset's productive capital value in the period. As an asset ages and its efficiency declines so does the productive capital value and the services the asset provides. In equilibrium, the value of capital services is equal to the gross returns (or rentals) to owners of capital; that is, the sum of COFC during the period and a return on the net capital stock of assets. The relationship between the capital services provided by an asset and the asset's productive value is fixed over the asset's life. However, this relationship varies from asset to asset and it depends on an asset's expected life, the discount rate, and the rate of decline in the asset's efficiency.

14.27    Consumption of fixed capital is always less than the value of the capital services, since the return to the owner of the asset must also cover the interest (or capital) cost of holding the asset. In other words, the value of the service has to not only cover depreciation but provide a return to the owner of the asset sufficient to cover the interest cost. More explicitly, in any given period, consumption of fixed capital is equal to the value of the capital services provided by the asset, minus the return to the owner of the asset.