ISBN 978-92-64-02563-9 Measuring Capital OECD MANUAL 2009 © OECD 2009

Chapter 14

Gross Fixed Capital Formation

123 II.14. GROSS FIXED CAPITAL FORMATION

Whatever the specific way of implementing measures of capital services and capital stocks, one of the key ingredients is investment data. Investment data should be broken down by type of asset and by economic activity. The level of disaggregation should be as detailed as the data allows and distinguish in particular those capital goods whose purchase prices follow different trends. Likewise, the industry break-down is important if it is believed that asset compositions vary greatly between industries and/or different industries face different depreciation rates, required rates of return and purchase prices of capital goods. The time series of current-price gross fixed capital formation (GFCF) data are deflated by the appropriate investment price index. The investment price index should be a constant-quality price index. By applying it to investment series at historical prices, they are converted to a sequence of comparable volume estimates of investment, approximately expressed in efficiency units of the year to which the investment price index is referenced. Typically, these are the efficiency units of the latest vintage. This is important because it implies that the volumes of past investment (initially expressed as physical units of the respective vintage) have now been converted into units of the latest vintage. An improvement in the quality in the class of assets is therefore treated as an increase in the volume measures of investment. GFCF is defined as the acquisition, less disposals, of fixed assets plus major improvements to, and transfer costs on, land and other non-produced assets. The assets acquired may be new or they may be used assets that are traded on second-hand markets. The assets disposed of may be sold for continued use by another economic unit, they may be simply abandoned by the owner or they may be sold as scrap and be broken down into reusable components, recoverable materials, or waste products. An important aspect of capital formation concerns improvements to existing assets, concerning in particular dwellings and land: “Gross fixed capital formation may take the form of improvements to existing fixed assets, such as buildings or computer software that increase their productive capacity, extend their service lives, or both. By definition, such gross fixed capital formation does not lead to the creation of new assets that can be separately identified and valued, but to an increase in the value of the asset that has been improved. A different treatment is applied to improvements to land in its natural state. In this case the improvements are treated as the creation of a new fixed asset and are not regarded as giving rise to an increase in the value of the natural resource. If land, once improved, is further improved, then the normal treatment of improvements to existing fixed assets applies. The distinction between which ordinary maintenance and repairs constitute intermediate consumption and which are treated as capital formation is not clear cut.” (Revised SNA, chapter 10). Assets acquired (or improvements carried out) are valued at purchasers’ prices which include all transport and installation charges as well as all costs incurred in the transfer of ownership in the form of fees paid to surveyors, engineers, architects etc. and any taxes

124 MEASURING CAPITAL: OECD MANUAL 2009 – ISBN 978-92-64-02563-9 – © OECD 2009 II.14. GROSS FIXED CAPITAL FORMATION

payable on the transfer. Generally, the national accounts treat costs of ownership transfer of assets as GFCF. The rationale is that ownership transfer costs constitute an element of cost that purchasers of assets take into account in their investment decision. Put differently, the value of an asset to its owner has to reflect these costs. Furthermore, in line with practice in statistical offices, flows of investment are considered to be spread evenly throughout accounting periods. In the model presented in Part III of the Manual, this idea is captured by the assumption that investment takes place at mid-period.

MEASURING CAPITAL: OECD MANUAL 2009 – ISBN 978-92-64-02563-9 – © OECD 2009 125 From: Measuring Capital - OECD Manual 2009 Second edition

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Please cite this chapter as:

OECD (2009), “Gross Fixed Capital Formation”, in Measuring Capital - OECD Manual 2009: Second edition, OECD Publishing, Paris.

DOI: https://doi.org/10.1787/9789264068476-17-en

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