Formats and related files
This discussion paper adds to the set of Living Standards Discussion Papers released in February 2018. Compared to the capitals covered in the February papers – human, natural and social – financial/physical capital is relatively more straight-forward given existing measurement frameworks such as the national accounts. The objective of the paper is to explain and assess the various indicators of financial/physical capital for the purposes of a Living Standards Dashboard.
The paper looks at alternative definitions of financial and physical capital, the gaps relative to indicators proposed by the Organisation for Economic Cooperation and Development (OECD), and the measurement of capital. The most appropriate measure of capital depends on the purpose of the analysis, the required coverage, and the availability of data. For example, the capital measures used in a national balance sheet are not the same as the measures used in the analysis of productivity.
The paper provides detail on the potential indicators for a dashboard using two broad perspectives. First, aggregate balance sheet information is part of the full suite of national accounts and helps relate economic growth to the accumulation of assets and how shocks affect the economy. A theme of the OECD and Treasury frameworks is that the capitals contribute in various ways to wellbeing. So the second perspective relates financial/physical capital to the production of goods and services and hence material living standards. The paper assesses the relevance and reliability of alternative indicators for New Zealand. From the balance sheet perspective we note the distribution of household net worth and the asset base of the Māori economy and Pacific peoples. From the economic growth perspective we note the important role of productivity.
The paper acknowledges the increasing role of intangible capital and challenges around output measurement. These challenges have motivated calls for amendments to existing measurement frameworks and/or placing more weight on a set of capital stocks. The applicability of these measurement challenges to New Zealand is still to be fully assessed. By design, the Treasury’s Living Standards approach considers a wide range of capitals. The extent to which the national accounts should be expanded to include a wider set of capitals would need to assess the primary purpose of the accounts, and whether estimates like Gross Domestic Product (GDP) would be affected.
Information from the New Zealand national accounts and other sources suggests it is feasible to generate the OECD indicators for this capital. However, the analysis in Smith (2018) and this discussion paper concludes that a somewhat different set of financial/physical capital indicators is appropriate for the Living Standards Dashboard. The proposed set is drawn from the national accounts and includes: aggregate household net worth; the net international investment position; fixed and intangible assets; investment, including in research and development (R&D); and multifactor productivity.
This paper builds on a Treasury internship project by Isabella Lenihan-Ikin. The paper makes extensive use of material published by Statistics New Zealand. The author thanks Statistics New Zealand staff for their feedback; in particular, Hamish Grant, Jonathan Sim and Lindsay Beck. Additional feedback was provided by Treasury staff and participants at a Productivity Hub seminar.
This paper is one of a series of Discussion Papers on wellbeing in the Treasury’s Living Standards Framework (LSF). The papers on the relationship between the LSF and the Sustainable Development Goals, Resilience and Future Wellbeing, and the note on the role of culture in the LSF are all Discussion Papers. The Discussion Papers are not the Treasury’s position on measuring intergenerational wellbeing and its sustainability in New Zealand. Our intention is to encourage discussion on these topics.
There are marked differences in perspective between the papers that reflect differences in the subject matter as well as differences in the state of knowledge. The Treasury welcomes comments on these papers to help inform our ongoing development of the Living Standards Framework.