Fixed Investment - Measurement

Measurement

The amount of fixed investment may be stated "gross" (before taking into account depreciation) or "net" (after depreciation). By subtracting disposals of fixed assets from additions to fixed assets in an accounting period, we obtain a measure of the net (fixed) capital formation.

In official statistics, attempts are often made to estimate the value of fixed capital assets in a nation, the value of their depreciation (or Consumption of fixed capital) and the value of Gross fixed capital formation by sector and type of asset. Fixed assets depreciate in value over time, due to wear and tear and market obsolescence. At the end of their useful lifetime (perhaps 7–10 years), they possess only a scrap-value (or at the very least must undergo maintenance work or repairs).

The concept of "gross fixed capital formation" (GFCF) used in official statistics however does not refer to total fixed investment in a country.

• Firstly GFCF measures only the value of additions to the fixed capital stock less the value of disposals of scrapped fixed assets. So normally total fixed investment in a year is in fact a larger value than GFCF. "Total fixed investment" (gross) is not usually a published statistical measure, since economists are interested primarily in the contribution of fixed investment to value added, i.e., they are interested in the net additions made to the total fixed capital stock (additions less withdrawals). If, hypothetically, the amount of fixed investment and the amount of scrapped fixed assets are equal in value, then the total fixed investment figure would tell us only that the scrapped fixed assets have been replaced. If we want to know by how much the fixed capital stock has increased, we need to know the relationship between fixed assets purchased and disposals of fixed assets.

• Secondly, GFCF does not include land purchases, only investments in land improvement, mainly because land purchased by one person or company from another does not normally increase the total amount of land there is (except in cases of land reclamation such as polders). All that happens is that the same land changes owners. If land is sold, it may yield a capital gain for the seller, but such profits from land sales are not usually made explicit in official statistics, in part because a standard valuation of what the land was previously worth is often difficult to operationalize, in particular if the land was improved or developed by the seller. The value of land can increase or decline due to all kinds of factors, and land valuations may differ from place to place. At best one could estimate the total value of land sales in an accounting interval.

For statistical purposes, investment in fixed capital must be distinguished from investment in intermediate goods. Unlike fixed assets, intermediate goods (for example, commodities like oil, electricity, timber, steel and grain) are completely used up in production (usually within a year). But this distinction is not always easy to draw, for example:

• if raw materials are held for more than one year before they are used,
• if expenditure occurs to install, service, insure or repair fixed assets (which can be part of the purchase contract)
• if physical "fixed" assets are sold off again in less than one year.

In official statistics, various accounting conventions are adopted to deal with these problems in a standardized way. A further complication is that scrapped fixed assets, being second-hand goods, may be resold and re-used again (for example, second-hand vehicles).