**The 2009 Rodriguez estimation of the return to capital in the private sector is based on a strong assumption on the treatment of labor income that affects the final estimation of the EOCK.** The return to capital in the private sector is estimated using national account statistics and adjusted on the basis of a strong single assumption that labor income should be treated as part of the gross operational surplus. This adjustment to the capital income reflects the share of labor income earned in unincorporated activities that are reported as capital income in the national accounts. The study assumes that out of the gross operating capital profits for the private sector recorded in the national accounts, 50 percent can be attributed to labor. To reflect on this, consider that if the initial allocation of gross value added for labor is 33 percent and for capital it is 67 percent, by assuming that 50 percent of capital income is in fact labor income, the result flips to about 67 percent for labor and 33 percent for capital. It is this assumption that leads to the 2009 study results and the recommended EOCK of 12 percent for Mexico.

# **_3.1.2 Updated analysis and commentary_**

**With the information provided in the Rodriguez (2009) study, we proceeded to recalculate a series of estimated values for the capital stocks, income to private capital, and rates of return to producible capital.** We checked for consistency of the Rodriguez data and key results with more recent national accounts data, although the full data set on investment flows and capital stocks, as well as the yearly values for the interest rates used for the original study, were not available. The 2009 study provides data on capital stocks for the initial (1970) and final (2006) years covered. Based on the initial ratios of value added (VA) for the public and private sectors and rates of return to each sector, we estimated the ratios of reproducible<sup>6</sup> private sector capital stocks, public sector capital stocks, and capital to GDP (K/Y), which are similar to the ratios estimated in the Penn World Table, version 8 (July 2013)<sup>7</sup> and other studies (Hofman, 2000; Loría and de Jesús, 2007).

**These estimations allowed us to recreate the estimated rates of return to private capital using the simplified weighted cost of capital methodology chosen by Rodriguez (2009).** To arrive at the estimated EOCK rate for the entire 1970–2006 period and extend it to 2012 using more recent national accounts data, these results have to be combined with the marginal cost of foreign savings or borrowing (MCFS). For this initial assessment, the MCFS is taken from the Rodriguez (2009) study as a constant variable. Because the price elasticity of domestic savings is assumed to be zero in the original document, there is no data for rates of return on domestic savings.

**The EOCK estimations for Mexico show a downward trend, mostly driven by the evolution of the rates of return in the private sector.** Confirming the results of the Rodriguez (2009) study, the recalculation shows a downward trend for Mexico’s EOCK (the upper trend line in

> 6 Reproducible here means subject to increase by investment less depreciation.

> 7 According to the website description, the Penn World Table “provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950– 2010.” For more information, see https://pwt.sas.upenn.edu/php_site/pwt_index.php.

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