Gross domestic capital formation: What are its components?

Capital is the produced means of production or it is called produced wealth by which more wealth is possible in the economy directly and indirectly. Capital formation means creation of physical assets and non- physical capital consisting of public health efficiency, visible and no visible capital.

According Harbigh human capital formation is the process of increasing knowledge, skill and the capacities of all people of the country.

Gross domestic capital formation is the addition to the capital stock within the domestic territory of a country during a year. The surplus of production over consumption during a year adds to the capital stock of a country. Gross capital formation which includes two components such as (a) Gross domestic fixed capital formation (b) change in stock.

Gross domestic capital formation includes all expenses made by household, business people and Govt, adding new durable goods to the fixed capital stock of a country. These assets are in the form of infrastructure such as buildings, roads canals, bridges, means of transport, machinery and other equipments. The value of the new fixed assets is equal to the expenditure made on new capital assets bought.

The difference between sale and purchase of second hand physical assets from abroad is known as the net purchase of second hand goods from foreign countries. It is also added with the fixed capital formation. If a country’s purchase of second hand assets is more than its sales of such assets, net purchase will be positive. But if the sale is more than the purchase the net purchase is negative. A negative purchase of second hand assets will reduce the gross domestic capital formation.

The change in stock means the change in stocks or inventories. The change in stock is the difference between market prices of the stock held by the Govt at the beginning and end of the period.

The change in stock is a flow concept. It keeps on changing. The change in stock means the stock of raw-materials, semi-finished and finished goods with the producer households, corporate and semi-corporate enterprises. Charge in stock consists of inventories with firms, charge in stock with the Govt and non-Govt. departmental undertaking, charge in live stock.

There is a difference between change in stocks and fixed capital formation. Change in stocks is determined by short term demand but fixed capital asset is determined by long term demand.