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Capital formation is a term used in national accounts statistics and macroeconomics. It basically refers to the net additions to the capital stock, or, to the value of the increase of the capital stock; though it may occasionally also refer to the total stock of capital formed. Measures of national income and output are used in economics to estimate the value of goods and services produced in an economy. ...
Macroeconomics is the economics sub-field of study that considers aggregate behavior, i. ...
A stock in business and social accounting refers to the value of an asset at a balance date (or point in time), while a flow refers to the total value of transactions (sales or purchases) during an accounting period. ...
In the USA, statistical estimates for capital formation were pioneered by Simon Kuznets in the 1930s and 1940s. Simon Kuznets Simon Smith Kuznets (April 30, 1901 – July 8/9, 1985) was an economist who won the 1971 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel for his empirically founded interpretation of economic growth which has led to new and deepened insight into the economic...
Wrong definition
According to one popular macro-economic definition, capital formation refers to "the transfer of savings from households and governments to the business sector, resulting in increased output and economic expansion". This definition is wrong on two counts.
Firstly, many larger corporations engage in corporate self-financing, i.e. financing from their own reserves, or through loans from (or share issues bought by) other corporations. In other words, this definition ignores that the largest source of investment capital consists of financial institutions, not individuals or households or governments. Admittedly, financial institutions are, in the last instance, mostly owned by individuals, but those individuals have little control over this transfer of funds, nor do they accomplish the transfer themselves. Few individuals can say they "own" a corporation, anymore than individuals "own" the public sector. (Poterba (1987) found that changes in corporate saving are only partly offset (between 25% and 50%) by changes in household saving in the United States).
Secondly, the transfer of funds to corporations may not result in increased output or economic expansion at all; given excess capacity, a low rate of return and/or lacklustre demand, corporations may not invest those funds to expand output, and engage in asset speculation instead, to obtain property income that boosts shareholder returns.
To illustrate, New Zealand's Finance Minister Michael Cullen stated (NZ Herald, 24 February 2005) that "My sense is that there are definite gains to be made, both economic and social, in increasing the savings level of New Zealanders and in encouraging diversification in assets away from the residential property market." The Hon. ...
This idea is based on a wrong understanding of capital formation, ignoring the real issue - which is that the flow of mortgage repayments by households to financial institutions is not being used to expand output and employment on a scale that could repay escalating private sector debts. In reality, more and more local capital value drains to foreign share-holders and creditors.
Types of capital formation Economists often use "capital formation" synonymously with Gross fixed capital formation (GFCF) but strictly speaking this is incorrect, because capital formation may include assets which are not fixed capital assets, for example, financial assets and land. Gross fixed capital formation (GFCF) is a macroeconomic concept used in official national accounts since the 1930s. ...
Fixed capital is a concept in economics and accounting, first theoretically analysed in some depth by the economist David Ricardo. ...
In modern econometrics, attempts are sometimes also made to estimate the formation of human capital, and expenditure on research & development (R&D) may also be regarded as capital formation. Likewise, Goodwill may be regarded as a form of capitalisation. Human capital is a way of defining and categorizing peoples skills and abilities as used in employment and otherwise contribute to the economy. ...
For the article about the charity: see Goodwill Industries. ...
Gross and net capital formation Capital formation can be valued gross (without deductions for depreciation) or net (adjusted for depreciation write-offs). This article needs to be cleaned up to conform to a higher standard of quality. ...
Measurement issues Capital formation is notoriously difficult to measure statistically, mainly because of the valuation problems involved in establishing the value of capital assets. Capital assets can for instance be valued at historic (acquisition) cost, current replacement cost, current sale value, average market value, or scrap value. A business owner may in fact not even know what his business is "worth" as a going concern, in terms of its current market value. The "book value" of a capital stock may differ greatly from its "market value", and another figure may apply for taxation purposes. The value of capital assets may also be overstated or understated using various legal constructions.
During an accounting period, additions may be made to capital assets (including those which are of a type that disproportionately increase the value of the capital stock) and capital assets are also disposed of; at the same time, physical assets also incur depreciation or Consumption of fixed capital. Also, price inflation may affect the value of the capital stock. Declining-balance depreciation of a $50,000 asset with $6,500 salvage value over 20 years. ...
This article needs to be cleaned up to conform to a higher standard of quality. ...
In national accounts, there is an additional problem, since the sales/purchases of one enterprise can be the investment of another enterprise. Therefore, to obtain a measure of the total net capital formation, a system of grossing and netting of capital flows is required. Without this, double counting would occur. Capital expenditure must be distinguished from intermediate expenditure and other operating expenditure. Measures of national income and output are used in economics to estimate the value of goods and services produced in an economy. ...
Investment or investing is a term with several closely-related meanings in finance and economics. ...
Double-counting is a term used to refer not simply to a math problem, but to a conceptual problem in social accounting practice, when the attempt is made to estimate the new value added by Gross Output, or the value of total investments. ...
Intermediate consumption is an economic concept used in national accounts, such as the United Nations System of National Accounts (UNSNA) and the US National Income and Product Accounts (NIPA). ...
Perpetual Inventory Method A method often used in econometrics to estimate the value of the physical capital stock is the so-called Perpetual Inventory Method (PIM). Starting off from a benchmark stock value for capital held, and expressing all values in constant dollars using a price index, additions to the stock are added, and disposals as well as depreciation are subtracted year by year (or quarter by quarter). Thus, an historical data series is obtained for the growth of the capital stock over a period of time. In so doing, assumptions are made about the real rate of price inflation, realistic depreciation rates, average service lives of physical capital assets, and so on. Econometrics literally means economic measurement. It is a combination of mathematical economics, statistics, economic statistics and economic theory. ...
A price index is any single number calculated from an array of prices and quantities over a period. ...
Example of capital estimates In the 2005 Analytical Perspectives document, an annex to the US Budget (Table 12-4: National Wealth, p. 201), estimates are provided for the value of total tangible capital assets of the USA, which doubled since 1980 (stated in trillions of dollars, at September 30, 2003): The numeral trillion refers to one of two number values, depending on the context of where and how it is being used. ...
Publicly owned physical assets:
Structures and equipment . . . . . . $5.6 federally owned or financed . . . $2.2 Federally owned . . . . . . . . $1.0 Grants to state and local govt . $1.0 funded by state and local govt . . $3.3 Other federal assets . . . . . . . . $1.4 Subtotal (1). . . . . . . . . . . . . . . . . . . . . . . . $6.9 trillion
Privately owned physical assets:
Reproducible assets . . . . . . . . $28.7 Residential structures. . . . . . $12.4 Nonresidential plant & equipment $11.8 Inventories . . . . . . . . . . . $1.5 Consumer durables . . . . . . . . $3.1 Land . . . . . . . . . . . . . . . $10.2 Subtotal (2). . . . . . . . . . . . . . . . . . . . . . . . $38.9 trillion
Education capital:
federally financed . . . . . . . . . $1.4 financed from other sources . . . . $44.0 Subtotal (3) . . . . . . . . . . . . . . . . . . . . . . . $45.4 trillion
Research and development capital:
federally financed R&D . . . . . . . $1.1 R&D financed from other sources . . $1.7 Subtotal (4). . . . . . . . . . . . . . . . . . . . . . . . $2.9 trillion
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . $94.1 trillion
Net claims of foreigners on US . . . . . . . . . . $4.2 trillion
Net wealth . . . . . . . . . . . . . . . . . . . . . . . . .$89.9 trillion
(Note: this data obviously does not include financial assets, only "tangible" assets in US territory).
See also In politics, a capital (also called capital city or political capital — although the latter phrase has an alternative meaning based on an alternative meaning of capital) is the principal city or town associated with its government. ...
Fixed capital is a concept in economics and accounting, first theoretically analysed in some depth by the economist David Ricardo. ...
Human capital is a way of defining and categorizing peoples skills and abilities as used in employment and otherwise contribute to the economy. ...
Social capital is a socio-economic concept with a variety of inter-related definitions, based on the value of social networks. ...
Constant capital (c), is a concept created by Karl Marx and used in Marxian political economy. ...
Most generally, the accumulation of capital refers simply to the gathering or amassment of objects of value; the increase in wealth; or the creation of wealth. ...
This article needs to be cleaned up to conform to a higher standard of quality. ...
Gross fixed capital formation (GFCF) is a macroeconomic concept used in official national accounts since the 1930s. ...
Double-counting is a term used to refer not simply to a math problem, but to a conceptual problem in social accounting practice, when the attempt is made to estimate the new value added by Gross Output, or the value of total investments. ...
References Simon Kuznets, "Proportion of capital formation to national product". American Economic Review, 1952.
Simon Kuznets et al., National income and capital formation, 1919-1935. National Bureau of Economic Research, 1937.
Simon Kuznets, Capital in the American Economy Princeton: Princeton University Press, 1961.
Simon Kuznets, Commodity flow and capital formation. New York: National Bureau of Economic Research, 1938.
Simon Kuznets, Gross capital formation, 1919-1933. New York: National Bureau of Economic Research, 1934.
James Poterba, "Tax Policy and Corporate Saving", in Brookings Papers on Economic Activity, 2, 1987, pp. 455-503.
Richard Ruggles and Nancy D. Ruggles, National Income Accounts and Income Analysis. New York: McGraw-Hill, 1956.
M. Yanovsky, Anatomy of Social Accounting Systems. London; Chapman & Hall, 1965.
"Analytical Perspectives" http://www.whitehouse.gov/omb/budget/fy2005/pdf/spec.pdf
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