Gross Fixed Capital Formation (GFCF)

Gross fixed capital formation (GFCF) is a macroeconomic term, which is basically a net investment. It is an integral part of the GDP calculation expenditure process. It is used in official national accounts such as the National Accounts Scheme (UNSNA), National Income and Commodity Accounts (NIPA), and the European Accounts Scheme (ESA). Statistically, it calculates the value of purchases by the business sector, governments, and “single” households of new or existing fixed assets (excluding their unincorporated enterprises) less disposals of fixed assets. The net increase in fixed capital is calculated to be more accurate in Gross fixed capital formation.

GFCF is referred to as “free” since the calculation does not require any changes to subtract fixed capital expenditure (depreciation of fixed assets) from the investment estimates. Gross fixed capital formation includes expenditure on land improvements (fences, ditches, drains, etc.); acquisitions of plants, machinery, and equipment; construction of roads, bridges, private residential homes, and commercial and industrial properties. GFCF isn’t a measure of total investment, because only the worth of net additions to fixed assets is measured, and every one style of financial assets are excluded, yet as stocks of inventories and other operating costs.

As GFCF is available for all countries, two candidate measures are evaluated as proxies for construction output, namely total GFCF and the construction element of GFCF. The GFCF measure often applies to the resident undertakings of the national territory and, thus, if, for example, oil exploration takes place in the open seas, the corresponding new fixed investment is allocated to the national territory in which the relevant undertakings reside. Developing countries also commit a higher percentage of GDP to investment, in general. Countries with high economic growth rates invest heavily in more fixed assets to allow for faster economic development.

GFCF is a flow value determined by the overall value of a producer’s purchases, minus disposition of fixed assets during the accounting period, plus some contributions to the value of non-produced assets incurred by the institutional unit’s productive operation. Some of the poorest countries are unable to afford the investment, and so rely on existing consumption. The paper supports the use of the total construction element in GFCF as a proxy for construction output. The Gross Fixed Capital Formation (GFCF) as specified by the European System of Accounts (ESA) consists of acquisitions by resident producers, less disposals, fixed assets over a given period plus some adjustments to the valuation of non-produced assets performed by the producer or institutional unit operation.

 

Information Sources:

  1. economicshelp.org
  2. wikipedia