Q. Consider the following statements with respect to the Gross Fixed Capital Formation (GFCF):
1.It is a component of GDP that shows how much new value added in an economy is invested rather than consumed.
2.GFCF is crucial because it directly contributes to the production capacity of an economy, influencing both economic growth and living standards.
3.Purchases of stocks and bonds are included in GFCF.
4.In national accounting, GFCF is considered as a form of investment expenditure.
How many of the statements given above are correct?
Explanation –
Statements 1, 2 and 4 are correct. Gross Fixed Capital Formation (GFCF) is a component of GDP that reflects the value of acquisitions of new or existing fixed assets by the business sector, governments, and households, minus disposals of fixed assets. It indicates the amount of resources invested in fixed assets rather than consumed. GFCF is crucial as it contributes to the production capacity of an economy, which in turn influences economic growth and living standards. It measures the additions to the capital stock of buildings, equipment, and inventories, i.e., additions to the capacity to produce more goods and income in the future. In national accounting, GFCF is considered a form of investment expenditure. It includes outlays on additions to the fixed assets of the economy plus net changes in the level of inventories, indicating investment in the productive capacity of the economy.
Statement 3 is incorrect. Purchases of stocks and bonds are not included in GFCF. GFCF measures investment in physical assets and does not include financial assets such as stocks and bonds. It is concerned with the value of net additions to fixed assets, excluding financial assets.
Source: The Hindu
