Capital Formation | Gross & Net

Capital formation is a term used to describe the net capital accumulation during an accounting period for a particular country. The term refers to additions of capital stock, such as equipment, tools, transportation assets and electricity. Countries need capital goods to replace the ones that are used to produce goods and services. If a country cannot replace capital goods, production declines. Generally, the higher the capital formation of an economy, the faster an economy can grow its aggregate income.

GDCF: GDCF is a measure of the total expenditure on investment by the production units within the economic (domestic) territories of a country. It is a measure of total investment. ‘Gross’ indicates that it is measured without subtracting any allowance for capital consumption; ‘domestic’ that it refers to investment in the country regardless of ownership. It thus includes investment in the country by companies owned by non-residents and excludes investment abroad by resident firms.

NDCF: NDCF is equal to the difference of the sum of GDCF and current replacement cost (CRC), also known by different names as consumption of fixed capital, depreciation or capital consumption.

GFCF:  Gross fixed capital formation (GFCF) is defined as the acquisition (including purchases of new or second-hand assets) and creation of assets by producers for their own use, minus disposals of produced fixed assets. The relevant assets relate to products that are intended for use in the production of other goods and services for a period of more than a year. The term "produced assets" means that only those assets that come into existence as a result of a production process recognized in the national accounts are included. This indicator is in million USD at current prices and PPPs, and in annual growth rates.

GFCF 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. GFCF is a component of the expenditure on gross domestic product (GDP), and thus shows something about how much of the new value added in the economy is invested rather than consumed.

GFCF is called "gross" because the measure does not make any adjustments to deduct the consumption of fixed capital (depreciation of fixed assets) from the investment figures. For the analysis of the development of the productive capital stock, it is important to measure the value of the acquisitions less disposals of fixed assets beyond replacement for obsolescence of existing assets due to normal wear and tear. "Net fixed investment" includes the depreciation of existing assets from the figures for new fixed investment, and is called net fixed capital formation.

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 stocks of inventories and other operating costs (the latter included in intermediate consumption). 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 most important exclusion from GFCF is land sales and purchases.