Gross domestic capital formation, Macroeconomics

 

Gross Domestic Capital Formation 

Production requires services of fixed assets such as machinery, equipment and structures as well as working capital i.e. stocks of raw materials, work in process, finished goods, etc. The act of replacing worn out assets and creating new assets is capital formation. Gross domestic capital formation (GDCF) consists of

i. Making good the depreciation on existing fixed assets

ii. Adding to the stock of fixed assets

iii. Adding to inventories 

Sometimes the first two of these together are called gross fixed investment while the third is called inventory investment. The word investment can be misleading. When you buy a corporate share on the secondary market (i.e. an existing share) you are making an 'investment' in the popular sense of the word. However, this may not lead to any capital formation at all; the person who sells the shares might spend the entire proceeds on current consumption. All that has happened is ownership of a part of existing assets has changed hands. We are concerned with replacement and new additions to physical assets not merely financial assets nor transfer of ownership of existing assets.

Bulk of domestic capital formation is financed from gross domestic savings (GDS). However, GDS need not equal GDCF. Domestic savings may be loaned to foreigners and contribute to capital formation abroad; conversely, foreigners may loan their savings to us for capital formation here. In the former case GDS will exceed GDCF, in the latter case GDCF will exceed GDS.

Treatment of a class of goods called consumer durables is problematic. When you buy a refrigerator, are you spending on current consumption or investing in a physical asset? Strictly speaking, it is the latter because you consume refrigeration service yielded by the refrigerator not the refrigerator itself, and the refrigerator will continue to yield such services over a number of years, just as a machine tool yields services over a number of years. However, it is the practice in many countries to regard expenditure by households on many consumer durables as consumption expenditure. The same refrigerator if it were bought by the research laboratory of a pharmaceutical company would have become 'capital formation'.If depreciation is subtracted from GDCF we get another aggregate called net capital formation.

It just indicates net additions to the stock of fixed assets. 

Posted Date: 9/11/2012 5:48:12 AM | Location : United States







Related Discussions:- Gross domestic capital formation, Assignment Help, Ask Question on Gross domestic capital formation, Get Answer, Expert's Help, Gross domestic capital formation Discussions

Write discussion on Gross domestic capital formation
Your posts are moderated
Related Questions
Explain the notion of the hidden momentum of population growth. Why is this an important concept for projecting future population trends in different developing nations?

A government subsidy to the producers of a product: A. reduces product supply. B. increases product demand C. increases product supply. D. reduces product demand.

can you tell me how this works, i am struggling to write my report in economics and i would like to know how much does it cost some help

Examine the graph below. The mayor has placed a $2 tax on the sale of each taco sold within the city. How large is the decrease in producer surplus?

Consider the case of cleaning up chemical contamination at an industrial site. The marginal benefits of additional cleanup are decreasing as the amount of cleanup increases. Howeve

Goods Market and Factors Market: Goods  market  is  the  market  where  goods  are  bought  and  sold  for  the  purpose  of consumption Factors markets are the markets

I am writing a macroeconomics commentary about a supply shock-induced inflation, can I include a shortage diagram I learnt in microeconomics and just change demand and supply to AD

Recognize which of the following purchases is counted as a part of NI: a) Tata motors purchases tire from Good year to equip latest Indica. b) Tata motors purchases tires fr

Aggregate Supply in the Short Run Production takes place in business sector on the basis of an expected price for its output. However, costs are incurred in anticipation of sa

The hypotheses are: The null hypothesis,  infers that a unit root exists, whereas the alternative hypothesis,  concludes that there is no root. Decision rule: