Gross Fixed Capital Formation

Gross fixed capital formation is essentially net investment. It is a component of the Expenditure method of calculating GDP.

To be more precise Gross fixed capital formation measures the net increase in fixed capital.

Gross fixed capital formation includes spending on land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; the construction of roads, railways, private residential dwellings, and commercial and industrial buildings. Disposal of fixed assets is taken away from the total.

gross-fixed-capital-formation-uk

Gross fixed capital formation – UK

The fall in Gross Fixed capital formation has been a significant contributor to the recent UK recession.  (contributions to UK growth)

Total Gross Fixed Capital Formation

gross-fixed-capita-formation-fredgraph

source: St Louis Fed

Investment is usually highly cyclical. (See: accelerator effect) The recessions of 1991 and 2008 saw a sharp fall in gross fixed capital formation. This is because if output falls, firms expect to make lower profits, therefore they start to think of cutting back output rather than increase it.

International Comparisons of Gross Fixed Capital Formation

Generally speaking, developing countries often devote a higher % of GDP to investment. Countries with rapid rates of economic growth are heavily investing in more fixed assets to enable rapid economic growth. China has one of the highest rates of gross fixed capital formation.

gross-f-c-f-country

China’s high rate of economic growth has been spurred by devoting a significant percent of resources to investment. Investment increases both aggregate demand, but also increases future productive capacity.

The UK and US economy are more geared towards consumption spending.

The global average for gross fixed capital formation is 20%

Some of the poorest countries, cannot afford investment, and so concentrate on current consumption. For example, at the height of the Zimbabwe crisis in 2008, investment fell to less than 3% of GDP.

Irish Investment

irish-gross-fixed-capital-formation

Irish investment is a mirror of their economic performance. After recovering from economic slowdown in the 1980s, the boom years saw rapid growth in investment. peaking at over 26% of GDP. However, with the onset of the credit crunch, investment has fallen to just 11% of GDP.

More on Definitions of Gross Fixed Capital Formation

Gross Fixed Capital Formation excludes

  • Land purchases
  • Effects of depreciation (referred to as consumption of capital)

The OECD define it as:

Gross fixed capital formation as defined by the European System of Accounts (ESA) consists of resident producers’ acquisitions, less disposals, of fixed assets during a given period plus certain additions to the value of non-produced assets realised by the productive activity of producer or institutional units. (OECD)

List of Countries Gross Fixed Capital Formation by % of GDP

Turkmenistan 60
Mongolia 48.6
China 45.5
East Asia & Pacific (developing only) 40.7
Belarus 37.6
Cape Verde 36.5
Lesotho 34.9
Sri Lanka 34.6
Liberia 33.3
Indonesia 32.4
Romania 32.2
Vietnam 31.9
Kosovo 31.2
Armenia 30.9
Senegal 30.7
Morocco 30.6
Lebanon 30.0
Nicaragua 29.7
India 29.5
Upper middle income 28.1
Tanzania 28.1
Botswana 27.9
Middle income 27.6
Panama 27.5
Low & middle income 27.5
Lao PDR 27.4
Benin 27.4
South Asia 27.3
Australia 27.1
Namibia 26.5
Bahamas, The 26.0
Mauritania 25.9
Thailand 25.8
Lower middle income 25.6
Other small states 25.4
Serbia 25.3
Gabon 25.1
Albania 24.9
Kyrgyz Republic 24.8
Bangladesh 24.7
Sudan 24.7
Mauritius 24.4
Uganda 24.4
Mozambique 24.3
Kenya 24.3
Ecuador 24.2
Tunisia 24.0
Czech Republic 23.9
Moldova 23.9
Kazakhstan 23.9
Peru 23.8
Uzbekistan 23.5
Congo, Rep. 23.4
Singapore 23.4
Bulgaria 23.3
Chile 23.2
Russian Federation 23.1
Jamaica 22.9
Europe & Central Asia (developing only) 22.8
Argentina 22.6
Slovak Republic 22.4
Latvia 22.4
Honduras 22.2
Montenegro 22.1
Croatia 21.9
Colombia 21.9
Ghana 21.8
Spain 21.7
Macedonia, FYR 21.5
Estonia 21.5
Paraguay 21.3
Jordan 21.3
Zambia 21.3
Nepal 21.2
Austria 21.1
Belgium 20.9
Malawi 20.8
Bosnia and Herzegovina 20.7
Sub-Saharan Africa (all income levels) 20.4
Sub-Saharan Africa (developing only) 20.4
Latin America & Caribbean (all income levels) 20.4
Mexico 20.4
Latin America & Caribbean (developing only) 20.4
Norway 20.2
France 20.1
Turkey 20.0
Costa Rica 19.8
Italy 19.5
Slovenia 19.5
Egypt, Arab Rep. 19.4
Togo 19.4
Euro area 19.3
Brazil 19.3
Ukraine 19.3
Finland 19.2
Saudi Arabia 19.0
Ethiopia 19.0
Luxembourg 19.0
Uruguay 19.0
South Africa 18.9
Europe & Central Asia (all income levels) 18.7
Tajikistan 18.7
Israel 18.7
Netherlands 18.6
European Union 18.5
Sweden 18.4
Burundi 18.4
Germany 18.2
Portugal 18.1
Kuwait 17.8
Lithuania 17.6
Gambia, The 17.5
Azerbaijan 17.2
Georgia 17.2
Denmark 17.2
Venezuela, RB 17.0
Hungary 16.7
Dominican Republic 16.7
Cote d’Ivoire 16.4
Philippines 15.8
Malta 15.0
Sierra Leone 14.9
Papua New Guinea 14.8
Guatemala 14.6
United Kingdom 14.3
El Salvador 14.2
Iceland 14.1
Greece 14.0
Macao SAR, China 12.3
Pakistan 11.8
Angola 10.7
Swaziland 10.4
Zimbabwe 6.5

Source: World Bank

Comments are closed.