Gross Fixed Capital Formation - Economic Analysis

Economic Analysis

Differences in the investment rates between countries very often mirror different levels of economic development and catching-up processes. This may be illustrated for the example of the member states of the European Union. Since the beginning of the millennium the average ratio of GFCF to GDP fluctuates around 20% in the European Union of 27 member states as a whole (EU-27). For some member states which accessed the Union in 2004 and later (mostly countries in central and eastern Europe where the level of GDP is still comparably low), the ratio rose to more than 25% in some years. When the consumption of fixed capital is deducted from the figures the resulting ratio of net fixed capital formation to net domestic product is around 8% for the average of the EU-27; again substantially higher ratios of more than 15% can be observed for some of the new EU member states such as Spain. Higher investment rates in poorer countries will lead to more equivalent living condition across Europe in the long-term through accelerated economic growth and an improved equipment of the labour force with modern infrastructure and technology. The detailed data on which these observations were made can be downloaded from Eurostat's website.

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.