Paris School of Economics - L'Agence Française de Développement

4.4.1. Estimating intangibles.
Intangibles are characterised by their nonverifiable
and non-visible nature, which makes
it difficult or sometimes unfeasible to apply
the perpetual inventory methodology. Some
intangibles are non-rival or have non-appropriable
returns. They are often developed inhouse,
offering no arms-length market transactions
as a basis for their quantification. This
is the case with brand promotion through
advertising or other means (brand equity) or
corporate management rules. Furthermore,
separating price and quantity components is
a tricky matter and even finding a suitable unit
of measure is not self-evident. When there
are no observable market prices, input costs
are used as a way of circumventing the lack of
direct observation. Another means of approximation
is the use of a generic output deflator
such as the non-farm business output price
deflator should no specific price deflators be
available. Approximation may be improved if
labour is not the only factor used in producing
the intangible. This lack of visibility stems from
the absence of physical media as in the case
of knowledge for instance. If knowledge is
counted as capital, the link between investment
expenditure and the capital stock is hard
to identify since depreciation rates are elusive.
However, this characteristic does not impact
the way in which knowledge is used over time.
Non-rivalry raises the problem of measuring
the marginal product of this type of capital.
It could be zero in the direct production of
the output — but improves production process
efficiency and product quality. The non-appropriability
of the return of some intellectual
property means that its marginal product
reflects only private benefits and costs.
Nonetheless marginal accounting principles
should apply to its valuation. It should be
valued according to the present value of the
discounted future expected income that it
creates, the reason for this being what was
described earlier with respect to welfare
theory. Investment is defined as any use of
a resource that reduces current consumption
in order to increase future consumption. Consequently,
all types of capital must be valued
symmetrically, be it spending on R&D, employee
training or plant and equipment. This
means that the consumption side must prevail
for unifying valuation principles whatever the
differences in the production process and
the practical difficulties of implementation.
How does the treatment of intangibles as
intermediary products or as changes in capital
modify national income? If spending on intangible
capital is excluded from investment, it
does not show up in the national income identity
that measures the rental flow on capital by
the residual value:
pkk=pCC+pI I-pLL .
Let us call N the volume of expenditure on
intangible capital in a given period and p N its
price, R the volume of intangible capital and
p R its user cost. The national income identity is:
pkk+pRR=pCC+ p I I+pNN-pLL.
The left-hand side of the identity is the nonlabour
payments accruing to both tangible and
intangible capital. Overall profit accruing to both
tangible and intangible capital is thus higher.
To estimate the volume of intangible capital of
a defined category using the perpetual inventory
methodology, it is necessary to calculate
real investment by dividing the flow of nominal
investment in a given period either by the
average labour cost or by the non-farm business
output deflator, depending on the nature
of the category.
December 2011 / Measure for Measure / How Well Do We Measure Development? / © AFD [ 201]