Working Paper No. 192
By Nicholas Oulton and Sylaja Srinivasan
Neo-classical theory provides an integrated framework by means of which we can measure capital stocks, capital services and depreciation. In this paper the theory is set out and reviewed. The paper finds that the theory is quite robust and can deal with assets like computers that are subject to rapid obsolescence. Using the framework, estimates are presented of aggregate wealth, aggregate capital services and aggregate depreciation for the United Kingdom between 1979 Q1 and 2002 Q2, and the results are tested for sensitivity to the assumptions. We find that the principal source of uncertainty in estimating capital stocks and capital services relates to the treatment and measurement of investment in computers and software. Applying US methods for these assets to UK data has a substantial effect on the growth rate of capital services and on the ratio of depreciation to GDP.