Abstract
Even though the true stock of capital is not directly observable, capital stock estimates are needed for production functions, cost and profit functions, growth theory, and interregional trade theory. The alternative is to make heroic assumptions concerning proportionality relationships between capital and other variables or strong equilibrium assumptions such as equalization of returns to capital across regions. The purpose of this paper is to statistically compare the two methods which have been used to estimate regional capital stocks, namely book value and the perpetual inventory method.
Highlights
Even though the true stock of capital is not directly observable, capital stock estimates are needed for production functions, cost and profit functions, growth theory, and interregional trade theory
Suffice it to say that either BV or PIM estimates of the capital stock are at best only crude estimates or proxies for the true but unknown stock of capital
The primary weakness of BV as a measure of the value of the capital stock is its failure to price that stock in today's prices or some constant dollar equivalent thereof
Summary
Even though the true stock of capital is not directly observable, capital stock estimates are needed for production functions, cost and profit functions, growth theory, and interregional trade theory. The purpose of this paper is to statistically compare the two methods which have been used to estimate regional capital stocks, namely book value and the perpetual inventory method (hereafter BV and PIM respectively). Examples of the former include Winkler[17] in this Review and others such as Lande and Gordon [7], Vinod [16], Moroney [9], and Moroney and Walker [10]. Ex amples of the latter include Field and Grebenstein [2], Persky [11], and Persky and Klein [12]
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