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157. Business Investment measures the fixed investment of businesses in assets, which are used for production. Both private and public corporations are included. All assets are covered except for land and existing buildings (which are existing assets being transferred to new owners) and dwellings (which are not used in production). Business investment was about two thirds of total gross fixed capital formation in 2002.

158. Business investment (and total GFCF) is a relatively volatile component of national accounts and is also relatively difficult to measure accurately. One key reason for this is that investment by individual businesses can be very lumpy. This makes it more difficult to assess the plausibility of information reported on inquiry forms. Large capital expenditure may be reported by smaller businesses in lightly sampled cells on the register, and decisions are needed on how to treat this when the inquiry results are grossed up to the population. Finally large expenditure may be undertaken by new businesses before they are trading normally and recorded on the ONS Business Register. These factors taken together result in a relatively volatile series, but they also make it likely that early inquiry results will understate the level of capital expenditure. This is allowed for when making estimates but is an additional area of uncertainty.

159. The volatility in the series also results in a high variance for the revisions. Akritidis (2003) gives the variance of the revisions to the expenditure components of GDP. Quarterly revisions to GFCF have the highest variance (2.987 percentage points), which contrasts with Household Final Consumption Expenditure – the largest component of GDP – which has a variance of 0.221 percentage points.

160. Most of the data for business investment comes from the quarterly capital expenditure inquiry (CAPEX). The inquiry covers production and non-production industries with roughly 32,000 forms sent out each quarter, with the sample size doubled about five years ago to increase accuracy.

161. The data are used to estimate quarterly business investment, the results of which are published in two first releases; Provisional Resultsare released just under two months after the end of the quarter and Revised Resultsjust under three months after the end of the quarter. The Provisional ResultsFirst Release contains early estimates for the latest quarter, which are then subject to revisions in the Revised

Results. Typically inquiry response rates might be around 50-60% for provisional

162. Volume estimates are produced using deflators based on a range of Producer Price Indices (PPIs), with adjustments taking account of the different prices for imported goods.

163. Revisions to the business investment dataset are made to time periods in line with the prevailing revisions policy for GDP. Reasons for revisions and their timing fall essentially into three categories.

164. Quarterly– Each quarter in the revised results release the inquiry results are updated to reflect new returns from contributors. These mainly affect revisions made at revised results stage but there can also be late and corrected returns from contributors after final results which will be used if they are significant. The GDP balancing processes allow the plausibility of inquiry results to be assessed against other components of the accounts including the estimates of the supply of capital goods. Balancing adjustments are often applied to the business investment series, because there is evidence that the early estimates of supply are more reliable than those of demand. These balancing adjustments can affect any of the quarters open for revision.

165. Annually– Each year an annual benchmarking process compares the quarterly data with results from the Annual Business Inquiry which has a larger sample size of approximately 70,000 businesses. Revised inquiry estimates are generated. This annual benchmarking process happens twice, once to in April against provisional ABI results and once against the final data. Thus by April 2004, the series will have been benchmarked to the final ABI results for 2001 and the provisional results for 2002. Deflator weights are also usually updated. Benchmarking is followed by annual current price supply use balancing which generates further adjustments and finalises the estimates for these two years, as part of a fully balanced set of accounts. The revised series will be published in the annual Blue Book.

166. Periodically– Other changes occur periodically. Many of these affect the deflation of the data – using rebased PPIs and full assessments of weights, lags and import adjustment factors. From time to time there are other methodological changes such as new industrial classifications, new approaches to measurement (e.g. computer software) and annual chain linking. Revisions to other components may also affect Business Investment through the supply use balancing process.

167. Over the period 1999Q1 to 2003Q3 the mean revision between Provisional and Revised releases was 0.40 percentage points, with an absolute mean revision of 1.74 percentage points. Over this period the average revision between the first and latest estimates is 0.65 percentage points, with an absolute mean of 1.73

percentage points. This suggests there is a downward bias in the provisional estimates, but this is too short a period to test whether the bias is statistically significant. A revisions analysis over a longer period will be included shortly in the

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