Economics

The concept of gross fixed capital formation is mostly applied in national accounts. This concept has been in use since 1930s. Some of the national accounts which use this concept includes UNSNA and NIPS. Gross fixed capital formation involves additions to fixed assets in a business. It is obtained by considering the total assets in a business which includes purchased assets. The total assets are obtained by deducting the all fixed assets which have been disposed off (Foss, 1994). This can be done on personal business, households and even government. The data used in calculating the gross fixed capital formation is made available by statistical agencies. These agencies are involved in compiling data which is made available on annual basis or even quarterly. Economic growth can be traced by considering this indicator. Gross fixed capital formation is used as an indicator for business progress. It gives future business activity.

Gross fixed capital formation is normally related to gross domestic product (GDP). It is indicated as a percentage of the gross domestic product. This is normally done in the private sector. This indicator is arrived at by considering the additional assets. All disposals are deducted from the assets. The disposed assets may be tangible or intangible. Some of these assets include machinery and equipment. Others include buildings and vehicles. This indicator also considers any additional value on assets. Private sector uses this indicator in making decision on investment.

Gross fixed capital formation considers the net additional investment. This new investment affects fixed capital assets which are controlled by businesses, households and government. A business activity level can be determined by using economic indicators. The data provided on gross fixed capital formation may be used as an economic indicator to determine the progress of a business activity (Fischer, 2004). This indicator does not portray the total investment in a business. This is because there are several omissions. These omissions include inventories stocks, financial assets. There are also other operating costs which are excluded. Gross fixed capital formation is a value which is obtained by considering all additions made on fixed assets. Disposals are normally deducted to arrive to a flow value. Value addition on assets is also considered. Machinery and equipment may acquire new value after some improvements done on them. It is not necessary that all the assets are tangible. Some assets such as software are intangible. Machinery and equipment are taken to be the main types of assets. There are some assets which are not included in gross fixed capital formation. Some of these include armaments, land, household equipment amongst others. Depreciation of assets is not considered in GFCF. This is why is referred to as gross. This brings about some confusion since the measure of GFCF is geared towards net additions. Some activities which change the value of assets is not included in the measure of GFCF. These include damages and destruction on fixed assets (George, 2005). This causes alterations to fixed assets since they have to be introduced to repair.

In conclusion, gross fixed capital formation is a value which is expressed in terms of the gross domestic product. It involves all net additions to fixed asset less disposals. Disposals of fixed assets such as machinery and equipment is valued and deducted from the total assets. This ratio is used as an economic indicator for business progress. It can be used as measure of the total investment of a business since some assets such as land are excluded.