Transportation and economics - Economics Essay Example
Transportation and economics
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According to OECD (2001) “The user cost of capital is the unit cost for the use of a capital asset for one period. It is the price for employing or obtaining one unit of capital services. The user cost of capital is also referred to as the rental price of capital good or the capital service price” (p 98).
User cost of capital entails the acquirement of capital goods until the benefit per period of another unit of capital goods is equal to the cost of owning and using the unit. However, the user cost is most naturally thought of as the cost per period of using a tangible capital good such as a machine which would be rented even if the company actually owns it.
The user cost of capital include several components: the first component is the opportunity cost of the funds tied up per unit of capital, the second component is the depreciation in the productive capacity of the capital goods during a particular period and the third component is the market price per unit of new capital. One way to illustrate this is as the machine ages, the amount it can produce per period diminishes (Armitage, 2005).
The user cost of capital differs from the asset price of capital in that the principle of user cost of capital can work in any condition whereas in the asset price of capital, inflation has to be considered as in a non inflationary environment, the value of an asset at the start of an accounting period is equal to the discounted stream of future rental payments that the asset is expected to yield. However, in an inflationary environment, it is necessary to distinguish between the observable rental prices for the asset at different ages at the beginning of a period and future expected rental prices for assets at various ages (Corrado, Haltiwanger, & Sichel, 2005).
Armitage, S. (2005). The cost of capital. Cambridge: Cambridge Univeristy Press.
Corrado, C., Haltiwanger, J.C., & Sichel D.E., (2005). Measuring capital in the new economy.
Chicago: University of Chicago Press.
OECD. (2001). Measuring Capital-OECD Manual. Paris: OECD Publication service.