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CCA and Capital Consumption

  1. May 18, 2005 #1
    What is the difference between Capital Consumption allowance and Capital consumption? If i'm looking to calculate, for example, GNP, i must add NNI to capital consumption to indirect taxes and subtract subsidies (with room for residual error). If i have onlt two values, what would best represent capital consumption, Consumption, or CCA?
  2. jcsd
  3. Jul 9, 2005 #2


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    Capital consumption is the real reduction in the value of the capital (a given piece of machinery, etc.) corresponding to the flow of services from using that piece of capital. Cap. cons. allowance is what the owner may or may not be putting aside (that is, saving) in order to replace that piece of capital when he or she decides that "it is time" to replace it with a new piece -- e.g. at the end of the capital's economic life.

    Consumption (unqualified, no adjectives) is not akin to anything like capital consumption. "Consumption" refers to household consumption of consumer goods (as opposed to capital goods). "Capital consumption" refers to the use of capital goods by their owners (a subset of households) and the resulting erosion in the value of their capital.

    CCA would definitely be a better approximation to CC. CCA would equal CC if capital owners in each period save an amount of resources that is exactly equal to the reduction in the value of the capital they own, which you expect to be the case in a steady state economy (but not necessarily in any other type of economy).

    Depreciation may be seen identical to capital consumption but you must be careful to define whether you are using the term in an economic context (real deprecaition) or an accounting context (depreciation according to an accounting scheme: e.g. linear.) The former corresponds to an economic representation of capital consumption; the latter to an accounting representation (i.e. the way capital is represented on accounting books, so to speak).

    I hope this is (still) useful.
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