Infrastructure and Investment: Gross Fixed Capital Formation
Government acquisition of goods and services intended to create future benefits, such as infrastructure investment or research spending, is called gross fixed capital formation, or government investment, which usually is the largest part of the government. Acquisition of goods and services is made through production by the government (using the government's labour force, fixed assets and purchased goods and services for intermediate consumption) or through purchases of goods and services from market producers. In economic theory or in macroeconomics, investment is the amount purchased per unit time of goods which are not consumed but are to be used for future production (ie. capital). Examples include railroad or factory construction.
Infrastructure spending is considered government investment because it will usually save money in the long run, and thereby reduce the net present value of government liabilities. Spending on physical infrastructure in the U.S. returns an average of about $1.92 for each $1.00 spent on nonresidential construction because it is almost always less expensive to maintain than repair or replace once it has become unusable. Similarly, public subsidy of college tuition will increase the net present value of income tax receipts because college educated taxpayers earn much more than those without college education. Likewise, preventative health care expenditures can save several hundreds of billions of dollars per year in the U.S., because for example cancer patents are more likely to be diagnosed at Stage I where curative treatment is typically a few outpatient visits, instead of at Stage III or later in an emergency room where treatment can involve years of hospitalization and is often terminal.
Read more about this topic: Government Spending
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