Gross fixed capital formation

The concept dates back to the National Bureau of Economic Research (NBER) studies of Simon Kuznets of capital formation in the 1930s, and standard measures for it were adopted in the 1950s.

If, for example, one examines a company balance sheet, it is easy to see that fixed assets are only one component of the total annual capital outlay.

The stock of produced fixed assets consists of tangible assets (e.g. residential and non-residential building, roads, bridges, airports, railway, machinery, transport equipment, office equipment, vineyards and orchards, breeding livestock, dairy livestock, draught animals, sheep and other animals reared for their wool).

Also ordinary repair work, purchases of durable household equipment (e.g. private cars and furniture) and animals reared for their meat are not part of GFCF.

It is sometimes difficult to draw an exact statistical boundary between GFCF and intermediate consumption, insofar as the expenditure concerns alterations to fixed assets owned.

Using the alternative of the so-called "perpetual inventory method", one begins with a benchmark asset figure and then cumulates GFCF year by year (or quarter by quarter), while deducting depreciation according to some method, all data being adjusted for price inflation using a capital expenditure price index.

Arguably though, the data do provide an "indicator" of the trend over time; using mathematical models one can estimate that the true rate is most likely to lie within certain quantitative limits.

If business confidence is low, enterprises are less likely to tie up new earnings in additional fixed assets, which are usually held for a number of years.

If, on the other hand, business confidence is buoyant, it is more likely that enterprises will spend more of their current earnings on longer-term investments in fixed assets.

Since the beginning of the millennium the average ratio of GFCF to GDP fluctuates around 20% in the European Union of 27 member states as a whole (EU-27).

For some member states which accessed the Union in 2004 and later (mostly countries in central and eastern Europe where the level of GDP is still comparably low), the ratio rose to more than 25% in some years.

Higher investment rates in poorer countries will lead to more equivalent living condition across Europe in the long-term through accelerated economic growth and an improved equipment of the labour force with modern infrastructure and technology.

[citation needed] The detailed data on which these observations were made can be downloaded from Eurostat's website[permanent dead link‍].

Spending on physical infrastructure in the U.S. returns an average of about $1.92 for each $1.00 spent on nonresidential construction because it is almost always less expensive to maintain than repair or replace once it has become unusable.

[4][5][6] Likewise, government spending on social infrastructure, such as preventative health care, can save several hundreds of billions of dollars per year in the U.S., because for example cancer patients are more likely to be diagnosed at Stage I where curative treatment is typically a few outpatient visits, instead of at Stage III or later in an emergency room where treatment can involve years of hospitalization and is often terminal.

Worldwide, this growing trade is worth hundreds of billions of dollars, and countries in Eastern Europe and Latin America, Russia, China, India and Morocco use large quantities of second-hand machinery.

But if assets migrate from one industry to another, or are imported and exported, or (in the case of means of transport) switch between different uses, the errors will persist.

Increasingly an attempt is made in many countries to identify the trade in second-hand assets separately if it occurs on a quantitatively significant scale (for example, vehicles).

GDP is supposed to measure the net new output, the new value added to the existing stock of wealth.

But given a growing domestic and international trade in second-hand equipment, GFCF may understate the true level of gross fixed investment activity and overstate the real additions to the capital stock, insofar as fixed assets produced at a previous time and resold later are also invested in, without this showing up in the accounts.

In the 1993 UNSNA standards (and earlier), offensive weaponry and their means of delivery were excluded from capital formation, regardless of the length of their service life.

Conceptually, the UNSNA accounts regarded military assets as providing "defence services" only at the point of their acquisition.