Working Paper Series: Special Edition of 2016 to 2018 Interns

TI (8) ln " − ln "$% = ∑ A % T U T,"$% − T,"$A Y − [ −1 − −2 ] where the weights, T are the relative capital rental rates and T are the different capital stocks. Quality of capital refers to changes in the composition of capital. If all components of the capital stock are growing at the same rate, quality remains unchanged., while if those with higher rental rates are growing more rapidly, quality increases (Loening 2005). Rental rates for St Vincent and the Grenadines were estimated using Equation (9) following Moore (2006): T," = (1 + " ) T," − (1 − ) T,"_% 5 Wages were reported on a monthly basis, but for use in the study, they were converted to average weekly wages by dividing each wage by 4. Weights were calculated based on each education level’s share of total monthly wages. 6 Hofman (1992) – Latin America, Prinsloo and Smith (1997) – South Africa, Schmalwasser and Schidowski (2006) – Germany, and Erumban and Das (2014) – India all concluded that the ratio capital stock for the 2 asset types in these countries was .75 to 0.25. Eastern Caribbean Central Bank (ECCB) and the World Bank. Following Craigwell, Maxwell and Moore (2005) andMoore (2006) depreciation for buildings and other structures and machinery were set at 0.02 and 0.08 respectively. As with the initial value of capital stock, disaggregated values for structures and machinery and equipment in 1970 was not available for use in the weighted average equation. The assumption that the capital stock ratio of buildings and structures to machinery and equipment in 1970 across many nations stood at .75 to 0.25 respectively was adopted. 6 As was the case with Barbados, United Nations trade data revealed that most machinery in St Vincent and the Grenadines was imported from the United States. Consequently, like Moore (2006), the export price index for machinery from the US was used to deflate the machinery and equipment investment series. The construction investment series was converted using the implicit price deflator of St Vincent and the Grenadines. Both deflators were taken from United Nations Statistics and adjusted the asset types to constant 2005 values. Using the approach developed by Christensen, Cummings and Jorgerson (1980) and applied by Moore (2006), the investment series were inserted into Equation (8) to obtain an estimate of the change in quality of capital as follows: (9)

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