Definition: Constant replacement cost

Category: National accounts

The capital goods are valued at the prices prevailing in a selected base year. The gross capital stock at constant replacement cost represents the value of the capital goods on the assumption that all capital goods were purchased in the base year. The net capital stock at constant replacement cost shows the value of the capital goods on the assumption that all capital goods were purchased in their present state in the selected base year.
Gross capital stock at the end of the year (t-1) + gross fixed capital formation during the year (t) - retirements during the year (t) = gross capital stock at the end of the year.
The capital stock at constant replacement cost is often referred to as "real" capital stock. This relies on the assumption that inflationary or deflationary changes in prices of capital goods can be identified and excluded from the calculations. As the valuation is done by deflation of investment series, all difficulties involved in deflation are however present in capital stock figures. This can be illustrated by computers as a capital good, which have experienced a large decline in price together with rising quality. As the price series are not able to separate quality determined changes in price from other determinants, this leads to substantial errors in the estimations. (In the case of computers, past figures at constant replacement cost are overestimated). Nevertheless, capital stock figures at constant replacement cost provide an approximation to inflation or deflation free values of capital. The data at constant replacement cost in the report under "Source were expressed in ECU at prices and exchange rates of 1985, abbreviated by "ECU85".