Question

State the meaning and any two components of Gross Domestic Capital formation.

Hint:

GDCF is the addition to capital stock including replacement for wear and tear. Name any two components, such as fixed capital formation and inventory investment.

Answer 1

Step 1: Understanding the Concept:
In national income accounting, investment means adding to the stock of capital goods of the economy.
Gross investment is also called Gross Domestic Capital Formation (GDCF).

Step 2: Meaning of GDCF:
Gross Domestic Capital Formation is the addition to the capital stock of the economy in a year.
It is called gross because it includes the replacement for the wear and tear that the capital stock suffers.
So GDCF = net addition to capital stock + depreciation (consumption of fixed capital).

Step 3: First component, Gross Domestic Fixed Capital Formation:
This is the spending on fixed assets such as machinery, buildings, factories and roads.
These assets are used again and again in production over many years.

Step 4: Second component, Inventory Investment:
This is the change in the stock of unsold finished goods, semi-finished goods and raw materials held by firms.
A rise in inventories adds to capital formation. A fall in inventories reduces it.

Final Answer:
GDCF is the addition to capital stock including replacement for wear and tear. Its two components are Gross Domestic Fixed Capital Formation and Inventory Investment.