In national accounts, CFC is a component of
value added or
Gross Domestic Product, and regarded as a cost of production. It is defined in general terms as the decline, in an accounting period, of the current value of the stock of fixed assets owned and used by a producer as a result of physical deterioration, normal obsolescence or normal accidental damage. The
UNSNA manual notes that "The consumption of fixed capital is one of the most important elements in the System... It may account for 10 per cent or more of total GDP." CFC is defined "in a way that is theoretically appropriate and relevant
for purposes of economic analysis". Its value may therefore diverge considerably from depreciation actually recorded in business accounts, or as allowed for taxation purposes, especially if there is price inflation. In principle, CFC is calculated using the actual or estimated prices and rentals of fixed assets prevailing at the time the production takes place, and not at the times fixed assets were originally acquired. The "historic costs" of fixed assets, i.e., the prices originally paid for them, may become quite irrelevant for the calculation of consumption of fixed capital, if prices change sufficiently over time. Unlike depreciation as calculated in business accounts, CFC in national accounts is, in principle,
not a method of allocating the costs of past expenditures on fixed assets over subsequent accounting periods. Rather, fixed assets at a given moment in time are valued according to the remaining benefits derived from their use. Depreciation charges in business accounts are adjusted in national accounts from historic costs to
current prices, in conjunction with estimates of the capital stock. In addition to gross measures of output and income such as GDP and gross national income (GNI), National Accounts include net measures such as net domestic product (NDP) and
net national income (NNI), derived by deducting CFC from the corresponding gross measure. GDP is the most accurate measure of aggregate economic activity. However, NNI represents the income actually available to finance consumption and new investment (excluding the replacement of capital consumed in production). It is therefore a more accurate measure of economic welfare.
Inclusions In UNSNA, included are: • all tangible and intangible fixed assets owned by producers. • fixed assets constructed to improve land, such as drainage systems, dykes, or breakwaters or on assets which are constructed on or through land - roads, railway tracks, tunnels, dams, etc. • Losses of fixed assets due to normal accidental damage, i.e. damage caused to assets used in production resulting from their exposure to the risk of fires, storms, accidents due to human errors, etc. • interest costs incurred in acquiring fixed assets, which may consist either of actual interest paid on borrowed funds, or the loss of interest incurred as a result of investing own funds in the purchase of the
fixed asset, instead of a financial asset. Whether owned or rented, the full cost of using the fixed asset in production is thus measured by the actual or imputed rental on the asset, and not by depreciation alone. If the fixed asset is actually rented under an operating lease or similar contract, the rental is recorded under
Intermediate consumption as the purchase of a service produced by the lessor. If the user and the owner are one and the same unit, CFC is considered to represent only part of the cost of using the asset. • Certain insurance premiums related to the acquisition or maintenance of fixed assets.
Exclusions In UNSNA, excluded are: • the value of fixed assets destroyed by acts of war, or exceptional events such as major natural disasters, earthquakes, volcanic eruptions, tsunami, exceptionally severe hurricanes, etc. (e.g.
Hurricane Katrina) which occur very infrequently. • valuables (precious metals, precious stones, etc.) • the depletion or degradation of non-produced assets such as land, mineral or other deposits, or coal, oil, or natural gas. • losses due to unexpected technological developments that may significantly shorten the service lives of a group of existing fixed assets.
Gross and net capital stocks In UNSNA, the value at current prices of the
gross capital stock is obtained, by using price indices for fixed assets at current replacement cost, irrespective of the age of the assets. The net, or
written-down value of a fixed capital asset is equal to its current replacement cost, less CFC accrued up to that point in time.
Criticism The main criticism, made of the way national accounts value CFC, is that in trying to arrive at an "economic" concept and magnitude of depreciation, they arrive at figures which are at variance with standard accounting practices. The business income cited in the social account is not the business income reported in profit and loss statements, but an economic income measure which is derived from accounting business income. Thus, the criticism centres both on the valuation principles used, and the additional items included in the aggregate, which are not directly related to depreciation charges in business accounts. Yet the whole computation affects the aggregate profit figures provided. Because of the way CFC is calculated, aggregate profit (or
operating surplus the residual item in the product account) is likely to be differ from the accounting profit calculation, which is usually derived from tax data. In
Marxian economics, the official concept of CFC is also disputed, because it is argued that CFC really should refer to the value transferred by living labor from fixed assets to new output. Consequently, operating expenditures associated with fixed assets other than depreciation should be regarded as either as circulating
constant capital,
faux frais of production or
surplus value, depending on the case. Furthermore, the measured difference between economic depreciation and actual depreciation charges will either add or lower the magnitude of total
surplus value. ==See also==