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Frequently asked questions about productivity – Capital

What is capital productivity?

Capital productivity growth shows how a change in the volume of assets, such as buildings, machinery, computers and IT, and land, affect output growth. An increase in capital productivity means that a unit of capital is producing more output than in the previous year, or that the same amount of amount is being produced for fewer capital inputs.

What is capital deepening?

Capital deepening reflects the change in the amount of capital available for each hour worked. It is measured by the growth in capital input over the growth in labour input. If capital input grows slower than the growth in labour input, then the amount of capital per worker declines. This is known as capital shallowing. Capital deepening is not the same as capital intensity, which reflects the amount of output attributable to capital.

What does capacity utilisation mean?

Capacity utilisation reflects the divergence between the potential and actual use of an input. Capacity utilisation is high when actual output is close to potential output because the most use is being made of labour and capital. Statistics NZ does not produce separate statistics for capacity utilisation. Some indications of capacity utilisation of capital are available from the New Zealand Institute of Economic Research’s Quarterly Survey of Business Opinion. This survey covers the manufacturing and construction industries only.

Statistics NZ’s productivity measures assume that capital and labour are used at a constant rate over time.

Which assets have you used?

The Statistics NZ capital stock model (calculated using the perpetual inventory method (PIM)) specifies 26 asset types, which are grouped into seven broader asset classes. These asset classes are residential buildings, non-residential buildings, plant machinery and equipment, transport equipment, other construction, intangibles, and land improvements. Further information on this method is available from Measuring Capital Stock in the New Zealand Economy.

There are some productive capital inputs that are not part of the PIM but are included in the capital input series. These assets are land and inventories. Land used for agriculture and forestry is included (from 1988), as well as commercial, industrial, mining, residential, and other land (from 1996). Inventories have been included from 1988 for the agriculture; forestry; manufacturing; wholesale trade; retail trade; and accommodation and food services industries. Timber and livestock assets are sourced as a part of the inventories series from 1980 onwards.

Do you make any assumptions about depreciation and age-efficiency profiles?

Yes. Within the capital stock model, each asset type’s mean expected useful life, along with a retirement function based on a distribution about its life and its pattern of efficiency decline, is specified.

The depreciation rate is also specific to a particular asset in a given industry. The rate of depreciation is the ratio of an asset's consumption of fixed capital to its productive capital stock. Both of these values are in constant prices.

What about the depreciation of land?

Land is treated as a non-depreciable asset in our model (land is a non-PIM asset).

How did you combine different assets within an industry?

The capital services index for a particular industry is a chain-linked Törnqvist index of the capital services provided by the assets within that industry. A Törnqvist index is used because it is consistent with the construction of the input indexes for multifactor productivity and the labour volume index.

How do you aggregate up from the individual industries when calculating the measured sector capital services index?

The capital services index for the measured sector is formed by a Törnqvist aggregation of the contributing industries' capital services indexes. The aggregation weights are the mean two-period industry shares of measured sector current price income.

How does contracting affect productivity estimates?

The effect of contracting on the official productivity series is unknown and cannot be identified easily.

If labour was contracted from the same industry (eg from services to agriculture to agriculture) then, in theory, value added and labour productivity for the agriculture, forestry, and fishing industry could remain unchanged. This is because contracting out should increase both gross output and intermediate consumption, and labour would be reallocated within that industry. The actual impact will depend on the measurement methods used for the industry affected. Value added might increase if the contractor was genuinely more productive, in which case this effect would implicitly be captured in value added.

An alternative case is if the contractor comes from another industry (eg labour was contracted from professional, scientific, and technical services to finance and insurance).

For the industry contracting labour, labour inputs may fall along with value added, as intermediate consumption would increase. Therefore, labour productivity would be unchanged unless the contractor was genuinely more efficient.

For the industry providing the contractor, their labour may increase as may value added (potentially leading to no change in labour productivity).

Is capital allocated to industries by ownership or by use?

Capital is allocated to industries by ownership. Other industries may benefit from using capital owned by other industries if it is hired out.

If an industry sells an asset to another and rents it back, the output of the renting industry stays the same, but its intermediate consumption will lead to a fall in value added. However, capital inputs will also fall, so capital productivity is potentially unchanged. The opposite effect may arise for the industry that now owns the asset, so total economy capital productivity might remain unchanged.

What are user cost weights?

The user cost is the cost of using a capital good for a specified period. It is similar to the wage rate for labour input. Statistics NZ’s user cost is determined by four factors: the asset price, as new, relative to its base period price; a real rate of return; the asset’s rate of economic depreciation; and the effective rate of non-income tax on production. The user cost is used to calculate an asset’s cost of capital, which is its user cost (ie rental price) multiplied by its flow of capital services.

Originally, Statistics NZ calculated an ‘endogenous’ rate of return for the user cost equation, where it was assumed that the remuneration of capital services exactly exhausted gross operating surplus. The current method calculates an exogenous rate of return (set at 4 percent) and excludes capital gains from the formulation of the user cost of capital and provides superior results in the New Zealand context.

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