A Short-Cut Method of Estimating Capital Stocks: When Can It be Used and How Well Does It Work?

Abstract

type=main> Relatively few countries currently publish estimates of capital stocks because of the difficulty of applying the Perpetual Inventory Method. A short-cut method which we term the Steady Growth Model (SGM) can produce plausible capital stock estimates provided certain conditions are met. Starting with a database covering 146 countries we conclude that the SGM can legitimately be used to calculate capital stocks for 53 of them. The 53 include equal numbers of high-income and low-income countries. The SGM requires only data on gross fixed capital formation for the base year, information about past growth rates of real GFCF, and assumptions about rates of depreciation. Despite its apparent simplicity, we show that our SGM stock estimates compare well with official stock estimates generated by the PIM. Other tests on capital–output ratios and capital-stocks per head confirm the plausibility of stock estimates generated by SGM.