Sometimes referred to as gross domestic fixed investment, the gross fixed capital formation (GFCF) has to do with changes that occur within a specified time frame to the physical assets related to the economy of a given nation. The range of physical assets involved can include improvements made to real estate, construction of roads and other avenues of conveyance that help to improve the infrastructure of the nation, facilities such as public schools and government buildings, and even factories, hospitals and private residences. The determination of gross fixed capital formation is important in the process of identifying the gross domestic product (GDP) of a nation during the time frame under consideration.
The focus of the gross fixed capital formation has to do with the amount of net increase that is realized during the time period that is being calculated. Typically, the approach will call for identifying any investments made in those assets during the period, as well as allowing for any disposals that occur during the same time frame. Factors such as any depreciation that occurs with the assets during this time, or the acquisition of land are not included, although those factors are accounted for in the broader calculation to determine GDP.
With gross fixed capital formation, understanding what is happening with business assets in terms of value of physical capital can be determined. As one indicator of the financial stability of a nation, the formation can have some effect on how the nation’s currency is viewed in the world market, possibly having a significant impact on the rate of exchange between the nation’s currency and that of other countries. Internally, the results of calculating the formation can provide insight into the movement of the economy within the nation, aiding the national government in identifying the best ways to address that movement and enhance the chances for continued growth.
The value of determining the gross fixed capital formation has to do with identifying increases, if any, that have occurred with the physical assets since the last calculation. From this perspective, the approach helps to identify any type of net growth that has occurred, making it possible to compare the amount of that growth with previous periods. Knowing this type of information makes it possible to assess what effect the current economic climate is having on those assets in terms of delaying improvements or triggering the disposal of physical assets of a certain type.
