Measurement Of Capital In Denmark

In December 1973, the so‐called 2nd Perspective Plan was published by the Danish Ministry of Finance. It included some 5 and 15 year forecasts of investments in the private sector, based on the projected development of production and labour. The forecasts were made by use of a simple Cobb‐Douglas production function, taking as capital‐input the stock of buildings and machinery, using the perpetual inventory method (assuming sudden death). Since the publication of these forecasts, an attempt has been made to refine the capital concept, measuring its services as factor input. Thus, it has been necessary to introduce an exogenous rate of interest. Inspired by Danish findings for private cars, depreciation functions for stocks and utility of machinery are developed. These functions may not seem very realistic for the heterogenous class of durables called machinery, but other possibilities appear even less convincing. Together with an assumption of exponential decay for buildings, it is possible to produce alternative time‐series for changes in input of capital in the production process. Some of the resulting estimates of parameters in the Cobb‐Douglas function give a better fit than the original version. But no value of the elasticity of production of capital is firmly established, e.g. it is obviously dependant upon the period of estimation, and therefore of no great value in forecasting. No firm connection between labour productivity and capital input (in short as well as the long run) has so far been revealed in Denmark, so no measure of capital is yet of great use in forecasting, except when future growth in production resembles that of the past fairly closely.