ing (1) "discovery" of new old-growth forest stocks (e.g., the rapid expansion of logging in the British Columbia interior to serve U.S. markets once U.S. prices had risen to the point that accessing this comparatively remote region became economic), and (2) the fact that the old-growth forests were replaced with faster-growing second-growth forests. Both effects attenuate price increases, causing the ordinary Hotelling model to overstate forest depreciation. These effects are the forest analog of mineral deposits analyzed in Chapter 3.

Transition models account in part for these problems by recognizing that forest growth offsets harvests. Assuming constant prices and a forest inventory recognized only by total net growth, this model suggests net accumulation is given by the difference between price and marginal harvesting cost times growth minus harvesting (rather than simply minus harvesting in the Hotelling model). By recognizing forest growth, such a formulation improves on the ordinary Hotelling approach, but still suffers the defects of (1) ignoring endogenous price changes in the sector, and (2) characterizing the forest only by net growth and not its more complex underlying age-class structure.

Managed second-growth forests.

Economic theory suggests that, once the transition between old- and second-growth forests is complete, timber prices will stabilize, and the economic return to holding forests will arise solely from forest growth. Vincent (1997) has analyzed this case and developed the appropriate measures of net accumulation for optimally managed second-growth forests. The appropriate estimate of the value of asset accumulation is more complicated here (see Appendix C for a full discussion). Accumulation depends on the forest age structure, discount rate, timber-yield function, and economically optimal rotation age. While this approach improves on both the Hotelling and transition approaches, certain shortcomings remain. In particular, this approach assumes that forest owners cut their trees at the economically optimal time and that timber prices grow at a constant rate. This theory of forest valuation can be used to formulate a practical approach to measuring the economic depreciation of forests. Before turning to that recommended approach, it is useful to examine BEA's work on forests and the international literature in this field.

BEA's Approach and International Comparisons

As noted, forests are part of Phase II of BEA's IEESA effort. As a consequence, BEA's work on forests to date has not been extensive and may need refinement (see Howell, 1996). In its current work, BEA separates forestland from the timber inventory. "Forests and other wooded land" are valued at the average value of agricultural land. In general,



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