Chapter 10: Rates of Return and Alternative Measures of Capital Input: 14 Countries and Ten Branches, 1971–2005
10. Rates of return and alternative measures of capital input: 14 countries and ten branches, 1971–2005 Nicholas Oulton and Ana Rincón-Aznar 10.1 INTRODUCTION The new EU KLEMS database constitutes a great advance in our ability to analyse trends and developments in the European economy and to compare it with other leading economies on a consistent and comparable basis. Because it is new and in many respects pioneering, it is important to subject the national data underlying it to stress-testing, to see whether its estimates are plausible in the light of economic theory and empirical evidence. This chapter deals with two issues. First, is the average rate of return to capital that is implicit in the estimates of capital compensation and capital stocks for each industry and each country in EU KLEMS a plausible one? Second, how sensitive are the measures of capital input and of capital’s contribution to output growth to alternative methods of estimation? On the first issue, if the implicit estimates of the rate of return for a particular industry or even for a whole country are very implausible, then the coherence and consistency of the national accounts of that country might be called into question. Even if the estimates of the rate of return seem reasonable, there is more than one way of using them to construct estimates of capital input (the second issue). So there is considerable interest in seeing how sensitive the estimates of capital input and of the contribution of capital to...
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