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ConstructingCapital

ConstructingCapital - Notes on Constructing Capital Series...

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Notes on Constructing Capital Series National accounts generally do not report a series for the capital stock, so the capital stock must be constructed using the perpetual inventory method: K t +1 = K t (1 - δ ) + I t where δ is a constant depreciation rate of capital and I t is real investment. The perpetual inventory method requires data on the series of real investment, a value for δ (we will use δ = 0.05), and a value for the initial capital stock, K 0 . The OECD’s Annual National Accounts and IFS both provide data on investment. When using the OECD, the category ”Gross Capital Formation” forms investment. When using the IFS, the category ”Gross Fixed Capital Formation” plus ”Changes in Inventories” forms investment. You can collect data on nominal investment and then deflate the series by a GDP deflator, or you may collect data in real variables, making sure that the capital stock series, and the real GDP series are deflated by the same price index. The initial capital stock is chosen so the capital-output ratio in the initial period equals the average
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