Gross Fixed Capital Formation

Definition: 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.

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 US

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.

China’s high rate of economic growth has been spurred by devoting a significant per cent 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 investment is a mirror of their economic performance. After recovering from an 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 defines it as:

“Gross fixed capital formation as defined by the European System of Accounts (ESA) consists of resident producers’ acquisitions, fewer 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)

Macroeconomic impact of an increase in gross fixed capital formation

In macro theory, a rise in investment should contribute towards higher aggregate demand (AD) and also increase productive capacity (LRAS). Increasing investment should lead to higher economic growth in the long-term (though it depends on how effective the investment is.

Opportunity cost of investment

The opportunity cost of gross fixed capital investment is lower consumption – at least in the short-term. If more resources are spent on capital goods, it leads to a decline in consumption of consumer goods.

With an economy operating on the PPF (no unemployment) an increase in capital consumption leads to move from A to B. But, in the long-term, the investment can enable greater productive capacity and PPF curve shifts to the right.

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

depr

Source: World Bank