Gross Fixed Capital Formation - Data and Time Series

Data and Time Series

While it is not possible to measure the value of the total fixed capital stock very accurately, it is possible to obtain a fairly reliable measure of the trend in net additions to the stock of fixed capital, since the purchase prices of investment goods is recorded. Usually statistics departments provide quarterly and annual data on GFCF. The GFCF of "pure" households is often considered as an indicator of households' confidence in the future since it consists of their investments in dwellings. However, the GFCF figure for dwellings refers only to the value of the net additions of the housing stock and housing improvements.

Often detailed breakdowns are available on request for GFCF,

• by type of asset (plant, machinery, land improvements, buildings, vehicles, etc.)
• by industry (for example, manufacturing, construction, services)
• economic sector (residential buildings versus non-residential buildings, or government sector versus private sector, the market sector versus the non-market sector).

GFCF time series data is often used to analyse the trends in investment activity over time, deflating or reflating the series using a price index. But it is also used to obtain alternative measures of the fixed capital stock. This stock could be measured at surveyed "book value", but the problem there is that the book values are often a mixture of valuations such as historic cost, current replacement cost, current sale value and scrap value. That is, there is no uniform valuation.

Using the alternative of the so-called "perpetual inventory method", one begins with a benchmark asset figure and then cumulates GFCF year by year (or quarter by quarter), while deducting depreciation according to some method, all data being adjusted for price inflation using a capital expenditure price index. Sometimes statisticians calculate "average service lives" for assets as a basis for valuation and depreciation estimates.

Econometricians acknowledge that the value of fixed assets is almost impossible to measure accurately, because of the difficulty of obtaining a standard valuation for all assets. By implication, it is also almost impossible to obtain a reliable measure of the aggregate rate of profit on physical capital invested, i.e. the rate of return. Arguably though, the data do provide an "indicator" of the trend over time; using mathematical models one can estimate that the true rate is most likely to lie within certain quantitative limits.

In recent times, Eurostat publishes the "business investment rate" (also called the "gross investment rate of non-financial corporations") in its quarterly sector accounts for the EU27. This ratio is defined as gross fixed capital formation divided by gross value added, in other words the share of GFCF in gross product. It provides an indication of how much of the total factor income is reinvested in new fixed assets. Normally that ratio is about 20%-23% of gross value-added. However, calling it the "business investment rate" or the "gross investment rate" is somewhat deceptive, since this indicator refers only to fixed investment, and more specifically, the net fixed investment (fixed assets bought, less disposals of fixed assets). The actual total funds which are spent by enterprises on investments, in gross terms, are much larger, both because enterprises invest in far more than fixed assets only (they also buy intermediate goods and services, and some financial assets), and because the total money they spend on buying fixed assets is larger than the same sum netted of asset disposals. The main reason why this Eurostat indicator is published is that it shows something about the longer-term expectations of enterprises. If business confidence is low, enterprises are less likely to tie up new earnings in additional fixed assets, which are usually held for a number of years. If, on the other hand, business confidence is buoyant, it is more likely that enterprises will spend more of their current earnings on longer-term investments in fixed assets. In turn, the rate at which enterprises invest earnings in longer-term assets is an indicator of business expansion - if the rate declines, then this typically lowers the rate of cumulative business expansion. For example, in the aftermath of the financial crisis of 2008-2009, the ratio dropped to slightly below 20% in Q1 2010 from a high of 23% in Q2 2008. Although this 3% drop in the ratio may not seem so large, in reality it signifies a very large amount of money that was no longer spent. The reason is that the total gross investment and gross value-added for the European Union amount to trillions of euro's, while the total gross value-added also fell significantly in 2008-2010.