THE SENSITIVITY OF CAPITAL SERVICES MEASUREMENT: MEASURE ALL ASSETS AND THE COST OF CAPITAL

The measurement of capital inputs is still a contentious issue: many choices have to be made that have potentially large effects on the resulting capital input series. This paper compares a large number of methodological choices and their impact on U.S. capital services at the industry and aggregate level. The results show that the set of capital assets covered and the choice for the rate of return matter substantially, while other choices are less important. I argue that land, inventories, and intangible capital should be included and that for pragmatic reasons, an external cost of capital is preferable to an internal rate of return because of its transparency and robustness to measurement error. Copyright 2010 The Author. Journal compilation International Association for Research in Income and Wealth 2010.