Gross Fixed Capital Formation - Second-hand Fixed Assets

Second-hand Fixed Assets

The fixed assets purchased may nowadays include substantial used assets traded on second-hand markets, the quantitatively most significant items being road vehicles, planes, and industrial machinery. 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. Often it is bought from Europe, North America and Japan, where fixed assets are on average scrapped more quickly.

Fixed assets disposed of may be sold for continued use by another producer, abandoned by the owner, sold as scrap, or recycled in part or as a whole. But occasionally a complete industrial plant is purchased, dismantled and reassembled somewhere else. Because GFCF conceptually includes many transactions in used fixed assets by resident firms, which are valued lower than new assets, this creates problems for the estimation and valuation of the gross capital stock.

If enterprise A sells a used asset to enterprise B, the valuation errors caused by the way that A and B each report this transaction will cancel out only if an overstatement of A’s reported GFCF is exactly matched by the understatement in B’s reported GFCF. 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. It may appear as though the total fixed capital stock has grown, even although the “net addition to fixed assets” refers only to the change in ownership of an already existing asset.

Statistical treatment of the trade in second-hand fixed assets varies among different countries. 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). In principle, if a fixed asset is bought during the year by one organization, and then resold to another organization during the same year, it should not be counted as investment twice over in that year; otherwise the true growth of the fixed capital stock would be overestimated. Hence statistical agencies traditionally often measured only the acquisition of newly produced fixed assets, or else tried to measure the net purchases of used assets. In general, also, the expenditure on Gross Domestic Product of which GFCF is a component should definitionally include only newly produced fixed assets, not second-hand assets. 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.