Introductory and Definitional Information

This page provides introductory and definitional information about the BEA methodology for estimating stocks of fixed assets and consumer durable goods and of depreciation, which is fully described in FIXED REPRODUCIBLE TANGIBLE WEALTH IN THE UNITED STATES, 1925-94 volume. An explanation is provided below of the key terms that appear in the files on the previous page.

Explanation of Terms

The following explanation of terms is presented in three sections: (1) fixed assets and consumer durable goods estimates; (2) investment, depreciation, net stock, and average age of the net stock; and (3) valuation of the estimates.

Estimates of Fixed Assets and Consumer Durable Goods

Fixed assets are defined by BEA to consist of private fixed assets (excluding durable goods owned by consumers) and government fixed assets. Private fixed assets consists of equipment and structures, including owner-occupied housing, located in the United States that are owned by private business or nonprofit institutions. Government fixed assets consists of equipment and structures owned by the federal government and state and local government entities, including government enterprises, located in the United States (except in the case of national defense equipment and U.S. embassies abroad, for which coverage is worldwide).1 Durable goods owned by consumers are goods purchased by households for their nonbusiness use with a life expectancy of at least three years.2

All of the estimates of fixed assets and consumer durable goods are classified by type of asset. In addition, estimates for private fixed assets are further classified by legal form of organization. Corporate business consists of all entities required to file federal corporate income tax returns (IRS Form 1120 series), including mutual financial institutions and cooperatives subject to federal income tax, private noninsured pension funds, nonprofit organizations that primarily serve business, Federal Reserve banks, and federally sponsored credit agencies. Sole proprietorships consists of all entities that would be required to file IRS Schedule C (Profits or Loss From Business) or Schedule F (Farm Income and Expenses) if the proprietor met the filing requirements and owner-occupied farm housing. Partnerships consists of all entities required to file Federal partnership income tax returns, IRS Form 1065 (U.S. Partnership Return of Income). Other private business consists of the following: all entities that would be required to report rental and royalty income on the individual income tax return in IRS Schedule E (Supplemental Income and Loss) if the individual met the filing requirements; tax-exempt cooperatives; owner-occupied nonfarm housing; and buildings and equipment owned and used by nonprofit institutions that primarily serve individuals.

Estimates for private fixed assets are also presented by industry based on the 1987 Standard Industrial Classification (SIC).3 Industry data are presented on an "establishment" basis; establishments, as defined for the purposes of the SIC, are economic units, generally at a single physical location, where business is conducted or where services or industrial operations are performed. In addition, the corporate business stock estimates are presented with the following special groupings of SIC industries. Financial industries consisting of the following SIC industries: depository institutions; nondepository institutions; security and commodity brokers; insurance carriers; regulated investment companies; small business investment companies; and real estate investment trusts.4 Nonfinancial industries consists of all other private industries.

Estimates for residential capital are also classified by "tenure group." Tenant-occupied residential assets consists of rental housing, including all government-owned residential assets. Owner-occupied residential assets consists of housing occupied by private owners.

In the distributions of fixed assets by type of owner, legal form of organization, and industry presented here, assets are classified on an ownership basis; that is, assets held under operating leases are recorded in the stock of the lessor while assets held under capital leases are recorded in the stock of the lessee. The ownership basis is used in order to be consistent with the National Income and Product Account's (NIPA's) and because the data necessary to compute stock estimates on a use basis are not available.

Estimates for the federal government are further classified by national defense and nondefense. National defense fixed assets consists of equipment and structures owned by the U.S. Department of Defense, with the following exceptions: family housing for the armed forces, civil works construction by the Army Corps of Engineers, industrial facilities, military hospitals, and the Soldiers' and Airmen's Home. Nondefense fixed assets consists of all other fixed assets owned by the Federal Government.

Investment, Depreciation, Net Stock, and Average Age of the Net Stock

Investment is the value of purchases of new fixed assets. For a given type of owner, it also includes net purchases of used assets from other types of owners (private business, governments, households, and nonresidents). Data are not available to adjust for transfers of used assets among industries or among legal forms of organization. Depreciation, also known as Consumption of Fixed Capital,5 is a charge for the using up of private and government fixed assets located in the United States, which is defined as the decline in the value of the stock of assets due to wear and tear, obsolescence, accidental damage, and aging. For most types of assets, estimates of depreciation are based on a geometric decline; empirical studies on the prices of used assets in resale markets have concluded that a geometric pattern of depreciation is appropriate for most types of assets. Net stock is the value of fixed assets adjusted for depreciation. With the perpetual inventory method that is used to derive the estimates presented here, the net stock in the historical-cost valuation and (at the individual asset) in the real-cost valuation, which are described below, is calculated as the cumulative value of past investment less the cumulative value of past depreciation.6 Net stock in current-cost valuation is the value of the items in the real-cost net stock measured in the prices of the current end of year.7 Average age of net stock for a given end of year is a weighted average of the ages of all investment in the stock at that yearend, with the weight for each age based on its value in the net stock.

Valuation of the Estimates

Historical-cost valuation measures the value of fixed assets in the prices of the periods in which the assets were purchased new. Real-cost valuation measures the value of these assets after the effects of price change have been removed. For this valuation, estimates for aggregate series are presented as chain-type quantity indexes, with 1996 equal to 100. These indexes are computed using annual-weighted Fisher type indexes to obtain year-to-year growth rates, which are chained together to obtain cumulative growth rates. Current-cost valuation measures the value of these assets in the prices of the given period, which are end of year for net stocks and annual averages for depreciation. The estimates of private net stocks and depreciation presented here are computed in historical-cost, real-cost, and current-cost valuations, and investment data are presented in historical-cost and real-cost valuations. The average ages of net stocks are presented only for the current-cost and historical-cost valuations. Estimates for government assets are presented on a similar basis except that estimates of net stocks and depreciation are not presented in historical-cost valuation.

Endnotes:

1. Purchases of fixed assets by government were first treated by BEA as investment in the national income and product accounts (NIPA's) in the comprehensive NIPA revision released in January 1996. See Robert P. Parker and Jack E. Triplett, "Preview of the Comprehensive Revision of the NIPA's: Recognition of Government Investment and a New Methodology for Calculating Depreciation," SURVEY OF CURRENT BUSINESS 75 (September 1995): 33-41.

2. For private business and government, equipment is defined as goods with a life expectancy of at least one year.

3. Executive Office of the President, Office of Management and Budget, STANDARD INDUSTRIAL CLASSIFICATION MANUAL, 1987 (Washington, DC: U.S. Government Printing Office, 1988).

4. Regulated investment companies, small business investment companies, and real estate investment trusts are included in the SIC classification "holding and other investment offices" and are not shown separately in the NIPA tables or in the estimates presented here.

5. BEA uses the terms depreciation and consumption of fixed capital synonymously. For business, the estimates of depreciation that are obtained in calculating net stocks are also presented as part of the NIPA's (as consumption of fixed capital). However, the estimates of government consumption of fixed capital that appear in the NIPA's differ from the estimates of depreciation of fixed assets owned by government that appear in these tables as the NIPA estimates do not include the adjustments made to general government capital for natural disasters and war losses. (See Robert P. Parker and Jack E. Triplett, OP. CIT., p. 36.)

6. This assumes that all assets that are retired (or discarded) are fully depreciated, i.e., have a value of zero. If this is not the case (e.g., because of disaster damage or intersector transfers of used assets), then the value of the net stock must be adjusted.

7. The difference between gross and net stocks of an asset in current-cost valuation is usually not equal to the sum of past depreciation charges on that asset in current-cost valuation because the difference between the two stock measures is a function of prices in only the current year while the past depreciation charges are a function of prices in all years since the asset was purchased.