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Varying the User Cost: A New Zealand Perspective

Varying the User Cost: A New Zealand Perspective. Joel Cook December 2006. Indexes. Output Based on published Valued Added Labour Hours paid. Capital input. Starting point is the National Accounts perpetual inventory method (PIM) Productive capital stock

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Varying the User Cost: A New Zealand Perspective

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  1. Varying the User Cost:A New Zealand Perspective Joel Cook December 2006

  2. Indexes • Output • Based on published Valued Added • Labour • Hours paid

  3. Capital input • Starting point is the National Accounts perpetual inventory method (PIM) • Productive capital stock • Gross fixed capital formation adjusted for efficiency decline and retirements • 24 assets are included from the PIM • Livestock, timber and land are calculated separately and added to the capital stock

  4. Capital input (cont) • Each asset generates a flow of capital services • Each asset is weighted by its user cost • Cost of using or ‘renting’ the asset for a period • Similar to the wage rate in the labour market

  5. User Cost Where: • pijt = the price index of new capital asset • iit = the nominal rate of return • dijt = the rate of economic depreciation • gijt = the capital gain effect due to the revaluation of the asset • xit = the average non-income tax rate on production

  6. Issues faced • Inclusion of inventories • Capital gains term • Endogenous or exogenous rate of return

  7. Inventories • Should inventories be included as capital stock?

  8. Capital Gains • Should capital gains be applied? • Should it be applied uniformly over all assets?

  9. Capital Gains (cont) • Published • Capital gains on all assets • No capital gains on any assets • One year capital gains on all assets

  10. Varying the Capital Gains

  11. Varying the capital gains

  12. Endogenous or Exogenous rate of return User cost of capital can be calculated using an: • Endogenous rate of returnOr • Exogenous rate of return

  13. Endogenous rate of return • Ex post • Uses available information • Requires strict conditions to be met

  14. Exogenous rate of return • Ex ante • Does not take account of industries’ risk profiles • Actual investment decisions are based on ex ante rate of return

  15. Varying the rate of return

  16. Endogenous vs Exogenous rate of return

  17. Conclusions • Inventories need to be taken into account somehow, but is including them as capital stock the best option?

  18. Conclusions (cont) • Varying the capital gains has a significant impact on the capital services • The choice of including a capital gains term should not be taken lightly

  19. Conclusions (cont) • Varying the rate of return did not have a large impact • Time series may not be long enough

  20. Discussion points • Inventories • Capital gains • Dealing with negative user costs

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