[OPE-L:5897] Re: BEA and Depreciation

John R. Ernst (ernst@PIPELINE.COM)
Wed, 31 Dec 1997 04:11:42 -0500 (EST)

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I write in response to your post of December 23, 1997.
Here let me deal with just a couple of issues raised.

1. I am curious about the manner in which data concerning
fixed capital is assembled in other countries. Are
the differences significant?

2. One problem I see with U.S. data (thanx to your post
and a BEA piece about the new methods of computing
depreciation) is that whenever possible the BEA prefers
to use the change in the selling price of the fixed
capital as the amount to be depreciated. That is, if
a new machine sells for $1000 and if at the end of the
period for $800, then 1000-800 or 200 is the depreciation
for that period.

Let's look at this a bit by way of example. Let's say that
a new machine is purchased for 1000, will last for 6 periods,
and produce output that sells for 250 at the end of each period.
Ignoring the investments in circulating capital and all other
fixed capital, we find that the rate of return is 12.798% and
with a bit of rounding can construct Table I.

Table I

Invested in Depreciation
Period Fixed Capital Depreciation Profit + Profit

1 1000 221 29 ---> 250
2 779 196 54 ---> 250
3 583 173 77 ---> 250
4 409 153 97 ---> 250
5 256 136 114 ---> 250
6 120 120 130 ---> 250

1000 500 1500

As Marxists we could say that this investment of 1000 is used to
produce 500 in surplus value over the 6 periods. We would clearly
recognize that the separation of depreciation and profit in each
period is deceptive. Yet, given we are interested in the
manner in which profits and depreciation amounts are separated and
seen by the individual capitalist owner of the machine, the period-
by-period view is of import. Ideally, we would like to see this
type of data as the foundation of the National Accounts. Indeed,
as stated above, the BEA in the U.S. prefers to collect data
from markets for used machines (or whatever) in order to arrive
at its depreciation figures. For us, this simply compounds the
confusion. For example, what if our capitalist of Table I were
to sell the machine at the end of period 1. Should he sell for
779, its book value by our reckoning? If he does, he clearly
loses as he would then have his initial 1000 back and a profit
of 29 at the end of period 1. Indeed, he is forced to mark up
the 779 by the rate of return and sell for 880 if his entire
investment is to earn the 12.798 %. Should he do so, we can
see how the new owner might view matters in Table II.

Table II
Invested in Depreciation
Period Fixed Capital Depreciation Profit + Profit

2 880 221 29 ---> 250
3 658 196 54 ---> 250
4 463 173 77 ---> 250
5 289 153 97 ---> 250
6 136 136 114 ---> 250

880 370 1250

Now if we look at matters over the six periods with this change in
ownership, we would figure the total depreciation on the machine
purchased for 1000 as the sum of the depreciation that the first
owner collected, 221, plus that of the second owner, 880, or, given
rounding, 1101. Further, the profits earned by the first, 29 plus
that of the second, 370, give us a total profit of 399.

My point here is that this type of thing can easily enter into the
accounts for US given the view that the selling prices of used
fixed capital are of use in calculating depreciation.

Have a good New Year,