Gross fixed capital formation

Gross fixed capital formation (GFCF) is a component of the expenditure on gross domestic product (GDP) that indicates how much of the new value added in an economy is invested rather than consumed. It measures the value of acquisitions of new or existing fixed assets by the business sector, governments, and "pure" households (excluding their unincorporated enterprises) minus disposals of fixed assets.

GFCF is a macroeconomic concept used in official national accounts such as the United Nations System of National Accounts (UNSNA), National Income and Product Accounts (NIPA), and the European System of Accounts (ESA). 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.

GFCF is called "gross" fixed capital formation because the measure does not make any adjustments to deduct the consumption of fixed capital (depreciation of fixed assets) from investment figures. In analyzing 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.^[1]

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.

GFCF notably excludes land sales and purchases. This is because when land is sold, the total amount of land in existence does not increase. Additionally, it is challenging to estimate the value of land in a standardized way. Therefore, only the value of land improvement is included in the GFCF measure as a net addition to wealth. In special cases, such as land reclamation from the sea, a river, or a lake (e.g. a polder), new land can be created and sold where it did not exist before, adding to fixed assets. The GFCF measure always applies to the resident enterprises of a national territory, and thus if a new enterprise is created, such as oil exploration on the open seas, the associated new fixed investment is allocated to the national territory in which the relevant enterprises are resident.

Data is usually provided by statistical agencies annually and quarterly, but only within a certain time-lag. GFCF is often considered to be a meaningful indicator of future business activity, business confidence, and patterns of economic growth. In times of economic uncertainty or recession, typically business investment in fixed assets will be reduced, since it ties up additional capital for a longer interval of time, with a risk that it will not pay itself off (and fixed assets may therefore also be scrapped faster). Conversely, in times of robust economic growth, fixed investment will increase across the board, because the observed market expansion makes it likely that such investment will be profitable in the future. This is the cross value end of the year of a country.