Fixed Capital Formation

Fixed capital formation refers to the process of a firm increasing its stock of fixed capital.

Fixed capital are assets used in the productive process, that a firm holds for over a year. (Fixex capital formation does not include current raw materials used in the productive process)

Fixed capital can also be referred to as Property, Plant, and Equipment (PP&E). For example, if a firm builds a new factory or invests in new machines, this will be an accumulation of fixed capital.

Examples of Fixed Capital Formation

  • Building or expanding existing factory
  • Purchase of transport equipment
  • Office equipment, such as computers, printers
  • Machinery used in the productive process

 

Gross Fixed Capital Formation

Gross fixed capital formation (net investment) is the net amount of fixed capital accumulation.

  • It measures the increase in the capital stock less the disposal of fixed assets.
  • It excludes land purchases
  • It excludes depreciation

Gross Fixed Capital formation is included in the expenditure approach to national income accounting.

Growth, year-on-year, for the expenditure components of GDP
Component20042005200620072008200920102011
Household final consumption expenditure3.32.71.62.8-1.6-3.01.3-1.1
NPISH final consumption expenditure1.30.0-0.40.2-2.2-4.62.13.2
General government final consumption expenditure3.42.01.50.61.60.80.40.1
Gross capital formation5.22.06.211.0-6.2-19.210.00.7
– of which GFCF5.02.46.38.2-4.6-13.73.5-1.4
– of which Bus. Investment-3.121.6-7.410.9-0.2-14.4-0.41.3
Exports4.89.112.1-2.51.2-8.26.44.4
less Imports7.06.910.1-1.7-1.8-11.08.00.5

Gross fixed capital investment means it doesn’t take into account the consumption of fixed capital. i.e. it ignores the effect of depreciation (e.g. a machine wearing out).

The World Bank define Gross Fixed Capital formation as:

Gross fixed capital formation (formerly gross domestic fixed investment) includes land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; and the construction of roads, railways, and the like, including schools, offices, hospitals, private residential dwellings, and commercial and industrial buildings. (World Bank)

OECD Definition of Gross Fixed Capital Formation

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)

Selected Gross Capital Formation as % of GDP

gross-fixed-capital-formation

China has one of highest GFCF as a % of GDP

Gross Fixed Capital Formation in the UK

gfcf-uk

UK Gross fixed capital formation has fallen to a low of 14% in 2011.

This entry was posted in . Bookmark the permalink.