APPENDIX:
Capital measurement issues
Investment in the Mining industry has been increasing in recent years. However, there may be a lag until there is any subsequent increase in production. This may be a reason that might explain the slowdown in productivity. That is, inputs are growing but without any growth in output.
In the process of constructing the mine, the company's expenditure is recorded as gross fixed capital formation, which forms part of the industry's productive capital stock. The assumption for measuring MFP is that the rate of capacity utilisation is assumed to remain relatively constant in production. This would not be the case until the building of the mine has finished. What this means for productivity measurement is that growth in capital services may be overstated during periods of strong investment growth, and MFP growth understated. The issue of capacity utilisation in the Mining industry is an area for further research.
Another possible issue with capital services measurement is that the observed fall in oil production may also change the rate of capacity utilisation. That is, the current capital services measure assumes that oil rigs are operating at a constant rate of capacity utilisation even though this rate may be declining, given oil field maturity. This would affect measured productivity because the capital services inputs are not adjusted to take into account any changes in the rate of capacity utilisation of assets, hence growth in capital services is being overestimated while MFP growth is underestimated. At the same time this assumes that these assets have not been fully depreciated or retired out of the perpetual inventory model. However, the converse may be the case; that is, oil rigs in use in the 1960s may be providing capital services, if they are still in use, but they may have been retired out of the model. Thus the overall measurement effect is unclear. The extent that the oil production facilities were being less than fully utilised is an area for further research. Any peak-to-peak analysis is also problematic, as the Bass Strait oil fields are not likely to again be able to achieve earlier levels of capacity utilisation.
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