Capital Consumption Allowance is the portion of a country’s GDP that is set aside to account for the decrease in value of capital assets over time. Capital assets include machinery, vehicles, buildings, and equipments used in the production of goods and services.
Hence, CCA (known simply as “depreciation”) matters because it measures how much a country needs to invest in its capital assets to maintain its current production. or goods and services. If a country is not investing enough to meet its CCA, then it’s using up its capital stock, which will bring about a future decline in production capabilities.
Here’s a look at CCA over time in the US:
How is CCA Measured?
The Capital Consumption Allowance measures depreciation, equivalent to estimating the decline of capital assets over some length of time as per use and obsolescence as new technology comes online. To calculate national depreciation (“depreciation in national accounts”), economists identify capital assets, determine its useful life, and then work backward to identify annual depreciation.
For example, say a car was purchased for $100,000. Let’s assume it’s useful to a business over a period of ten years, and we’ll use straight-line depreciation, which is a common method of calculating depreciation along with the declining balance and units of production method. Hence, since depreciation is linear using this method, the annual depreciation is $10,000. This means we would need to invest $10,000 per year to match the theoretical decline in production resulting from the depreciation of our capital asset.
If you take that example and expand it to capital assets across the country you get the Capital Consumption Allowance.
Economists take the CCA and substract it from GDP to get NDP, or Net Domestic Product. This reflects the total value of goods and services produced minus the loss of capital asset value used to production those goods and services.
Summed, the CCA helps policymakers, economists, and investors understand the health of an economy, the level of investment required to sustain growth, and better judge growth once adjusted for inherent decay.
To learn more, consider reading about the Economic Fluctuations Model, the Gains from Expanded Trade Model, and the Spending Allocation Model. Else, consider the other articles in my Economic List below.
