Home General Knowledge GK SPECIAL TOPIC : INVESTMENT CONCEPT
GK SPECIAL TOPIC : INVESTMENT CONCEPT
Written by Administrator   
Friday, 18 July 2014 07:35


 

 


INVESTMENT CONCEPT

I always wondered what investment is and how it is measured in national income concept. There are so many enterprises and sectors operating in the country so what are the way to arrive at national aggregates. So I decided to give it a try then I realized I do not know the basics of the concepts in investment that I should know before entering the arena for measuring. Here are some useful definitions that one encounters.

Capital Formation

It is a measure to calculate net additions to the (physical) capital stock of a country (or an economic sector) in an accounting interval, or, a measure of the amount by which the total physical capital stock increased during an accounting period.

Capital Accumulation

Capital formation refers to the total amount of capital that is accumulated in the country. This may be achieved either through creation of new capital or through the redistribution of the existing ones. For example a new building which changes hand is taken as capital accumulated whereas no formation actually takes place in that particular year.

Gross Capital Formation

In the national income accounts gross capital formation is measured as an addendum of the total value of the gross fixed capital formation (GFCF) and changes in inventories stock for that particular sector. Total capital formation in national accounting equals fixed capital investment, increase in the value of inventories held, net lending to foreign countries in an accounting period (a year or a quarter).

Net Capital Formation

When the Gross capital formation is adjusted for the depreciation cost that are incurred in maintaining the capital stock which is also termed as consumption of fixed capital is known as net capital formation

Gross Domestic Capital Formation

Total capital formation that takes place in a country in a year. It is a national income concept and it is usually referred as the total investment of the country.

Gross Domestic Fixed Capital Formation

Gross Fixed capital formation is defined as the total amount of fixed assets created and possessed by the country in a particular fiscal year.

Change in stock

Stock refers to the capital accumulated in a year at any point of time usually measured in terms of static variable. Change in stock refers to change in inventories over a period of time which is a dynamic flow concept.

Net Fixed Investment

Net fixed investment is the value of the net increase in the capital stock per year.

Depreciation Cost

The "depreciation" cost is the compensation for the cost of replacing fixed equipment used up or worn out, which must be deducted from the total investment volume to obtain a measure of the "real" value of investments. The depreciation compensates for the loss in capital value of assets due to wear & tear, obsolescence, etc.

ICOR

Incremental Capital Output Ratio – ICOR – is computed as the ratio of ‘changes in capital stock’ or ‘fixed capital’ in real terms to the change in real GDP. This also serves as an indicator of capital productivity. The ratio gives the amount of capital needed to produce one unit of output.

Difference between Capital Accumulation and Capital Formation

It is a specific statistical concept used in national accounts statistics, econometrics and macroeconomics. Generally the capital formation is measured by standard valuation principles. It is used also in economic theory, as a modern general term for capital accumulation, referring to the total "stock of capital" that has been accumulated, or to the growth of this total capital stock.

In the national income accounts gross capital formation is measured as an addendum of the total value of the gross fixed capital formation (GFCF) and changes in inventories stock for that particular sector. Total capital formation in national accounting equals fixed capital investment, increase in the value of inventories held, net lending to foreign countries in an accounting period (a year or a quarter)

“Capital accumulation" is not an accounting concept as capital accumulated is not measured in national income accounts. It is the capital formation in terms of total gross and net capital formation that is measured in national income. Capital accumulation is more ambiguous and is much broader concept as it can correlate to amassment of wealth either through a redistribution of capital assets or through a net addition to the total stock of capital in existence. Capital accumulation is more static than the formation. For example capital gets accumulated in society as some people get much wealthier, even though society as a whole becomes poorer, and the net capital formation might have actually decreased. However the difference is only in terms of accounting.

 


 

 

 

 

Add comment


Security code
Refresh

Articles
Newsletter Subscription
Fill the form below to subscribe for recieving email alerts from rosemaryinstitute.com