Gross capital formation is Definition, features and rules

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:40

Many are wondering why you need to study economics. But every business is built on the foundations of this subject, and it is important to know some of the definitions and rules that you may encounter when running your own business. In addition, the entire economic system of the country is built on the concepts of this science. In the article, we will analyze and find out what gross capital formation is and what functions it performs.

Definition

We all know from childhood that in order to save a certain amount for the desired acquisition, firstly, you need to save, and secondly, save money. A kind of accumulation process takes place, which in the future will be beneficial for acquiring something. The same system works both in business and in the state.

Gross capital formation is the purchase of products, services or some valuables (shares), which further increase fixed capital. In other words, a legal or natural person (resident) makes some kind of profitable acquisition that is not consumed, but gradually accumulates and leads to an increase inarrived.

What is it?

Gross capital formation is the purchase of assets that are not denominated in monetary terms.

There are only two types of accumulation:

• Real - is the acquisition of any property: offices, buildings, buildings, technical equipment and so on.
• Intangible is securities, documents, buying ideas, innovation, works of art or literature, scientific papers and the like.

What's included

There are several elements that must be included in the process of gross capital formation:

• The first component is to buy innovative technologies and ideas or develop those already acquired at the moment.
• Costs that increase productivity efficiency.
• Costs associated with the transfer of property rights for the acquisition of intangible assets (for example, taxation).

Accumulation and gross domestic product

Gross capital formation is a complex system of savings. It consists of several main parts, which we will talk about now. In addition, gross capital formation of GDP shows the market price of products and services.

Consists of several elements:

• Accumulation and saving of the main profit.
• Conversion of inventories.
• Purchasing significant acquisitions (original literary works, jewelry, etc.).

Features of capital formation in Russia

With the help of an example, we will try to understand the main specifics of the national income, as well as its characteristics and features. Let's analyze Russia's gross capital formation.

Take the last decade, from 2007 to 2017. It can be analyzed that capital formation in the Russian Federation has grown by an estimated 0.7 percent. This is important for the state, as the overall level of economic development has increased. The highest rate was recorded in 2008 at 22 percent, and the lowest in 2015 at 19 percent.

In general, if we compare the accumulation of fixed capital now and in the early 2000s, we can observe a huge jump. In 2001, it is two times lower than in our time. According to statistics, in 2012 the Russian Federation ranked seventh in terms of national capital formation of fixed assets worldwide, which at that time amounted to a huge amount - almost 14 billion of the national currency (rubles).

As for foreign investment, there is also an economic breakthrough. From 2007 to 2009 it was 16 percent, which is much more than in other countries during that period. Now the national accumulation in the country is quite stable and stable. In general, gross capital formation is the investment of funds in fixed assets in order to generate new profits in the future.

The diagram below is shown. It shows how the volume of gross savings in Russia changes over time.

Rules for increasing the indicator

Of course, the final consumption of gross capital formation occupies a significant part in the economy of the state, since it is important to properly distribute and invest money in the areas of life necessary for development, for example, production. However, no less significant is the increase in income levels. But how to achieve it? There are some rules, following which the state can contribute to the rapid growth of capital:

• Monitoring and coordinating external debts, which will be focused on a significant reduction in servicing costs.
• The need to plan and implement criteria and methods that would reduce the export of capital and help attract foreign investment.
• Prohibition on the growth of gold and foreign exchange resources.

All this will help to increase the level of gross capital formation of the country. However, often the value is also determined by other factors, such as:

• Gross Domestic Product.
• All the profits of the state, which is aimed at spending and maintaining the stability of the economy.
• The ability to use resources to generate public capital accumulation.

Reasons

What causes can arise and slow down education and increase in national income?

These include:

• Lack of innovation in an industry that requires technical innovation and transitionlevel.
• Low overseas sales.
• Poorly developed financial side of the life of the state (business), both external and internal.
• There is no progress in science and culture that would contribute to social development.
• Not enough attention is paid to foreign economic activity.

To solve these problems, the state should:

• First of all, establish contacts with international staff;
• purchase new technologies for production;
• requalify;
• take measures to improve the social and cultural level of the population;
• provide all the necessary conditions to meet all needs.

As for business, here you need to look for new opportunities for development and attracting income.

Gross capital formation is the ability to save money for future investment; it is the acquisition of both tangible and intangible assets to increase profits.