CONCEPT – GROSS FIXED CAPITAL FORMATION (GFCF)

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CONCEPT – GROSS FIXED CAPITAL FORMATION (GFCF)

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• What is GFCF? Gross fixed capital formation (GFCF) is net investment in an economy, and is a component of the Expenditure method of calculating GDP. It measures the net increase in fixed capital, and includes spending on plant, machinery, land improvements and equipment purchases; the construction of roads, railways, private residential dwellings, and commercial and industrial buildings. Disposal of fixed assets is subtracted from the total.
• Simply speaking: GFCF refers to the net increase in physical assets (investment minus disposals) within the measurement period. It does not account for the consumption (depreciation) of fixed capital, and also does not include land purchases. So, it measures the value of acquisitions of new or existing fixed assets by the business sector, governments and "pure" households (excluding their unincorporated enterprises) less disposals of fixed assets.
• Details of GFCF: Thus, it is a macroeconomic concept used in official national accounts methods like the United Nations System of National Accounts (UNSNA), etc. Since the GFCF is a component of the expenditure on gross domestic product (GDP), it shows how much of the new value added in the economy is invested rather than consumed. (so future promise of new GDP creation)
• Why “Gross”? GFCF is called "gross" because it does not make any adjustments to deduct the consumption of fixed capital (depreciation of fixed assets) from the investment figures.
• What it is not? GFCF is not a measure of total investment, because only the value of net additions to fixed assets is measured, and all kinds of financial assets are excluded, as well as inventories and other operating costs. The most important exclusion from GFCF is land sales and purchases.
• Global scene: Investment is usually highly cyclical. A recession will lead to 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.

1. 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.
2. The UK and US economy are more geared towards consumption spending.
3. The global average for gross fixed capital formation is 20%.
4. Some poor countries that cannot afford investment, and concentrate on current consumption.

• Difference between GPDI and GFCF:
  
  1. Gross private domestic investment is the measure of physical investment used in computing GDP in the measurement of nations' economic activity. This is an important component of GDP because it provides an indicator of the future productive capacity of the economy. It includes replacement purchases plus net additions to capital assets plus investments in inventories.
  2. Gross fixed capital formation (GFCF) is a macroeconomic concept used in official national accounts. GFCF is a component of the expenditure on gross domestic product (GDP), and shows how much of the new value added in the economy is invested rather than consumed. 
• India’s Gross Fixed Capital Formation: It was reported at 204.700 USD bn in Mar 2018. This records an increase from the previous number of 186.113 USD bn for Dec 2017.
  
  1. India’s Gross Fixed Capital Formation data is updated quarterly, averaging 88.862 USD bn from Jun 1996 to Mar 2018, with 88 observations.
  2. The data reached an all-time high of 204.700 USD bn in Mar 2018 and a record low of 20.971 USD bn in Jun 1996.
  3. India’s CSO (Central Statistics Office) provides Gross Fixed Capital Formation in local currency based on SNA 2008, at 2011-2012 prices.

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