All Topics  
Fixed investment

 

 
   Email Print
   Bookmark   Link
 

 

Fixed investment
 
 
  Topics Fixed investment Topic Home

Fixed investment in economics
Economics

File:Ballard Farmers' Market - vegetables.jpgEconomics is the Social sciences that studies the Production theory basics, Distribution , and Consumption of Good and Service ....
 refers to investment in fixed capital
Fixed capital

Fixed capital is a concept in economics and accounting, first theoretically analysed in some depth by the economist David Ricardo. It refers to any kind of real or physical capital that is not used up in the production of a product and is contrasted with circulating capital such as raw materials, operating expenses and the like....
, i.e. tangible capital goods (real means of production
Means of production

Means of production , include machines, tools, plant and equipment, infrastructure, and so on: "all those things with the aid of which man acts upon the subject of labor, and transforms it." ....
 or residential buildings), or to the replacement of depreciated
Depreciation

Depreciation is a term used in accounting, economics and finance to spread the cost of an asset over the span of several years.In simple words we can say that depreciation is the reduction in the value of an asset due to usage, passage of time, wear and tear, technological outdating or obsolescence, depletion, inadequacy, rot, rust, decay o...
 capital goods.

Thus, fixed investment is investment in physical assets such as machinery, land, buildings, installations, vehicles, or technology. Normally, a company balance sheet will state both the amount of expenditure on fixed assets during the quarter or year, and the total value of the stock of fixed assets owned.

Why fixed?
The use of the term "fixed" refers not so much to the asset being invested in "staying in one place", but to the circulation of flows
Stock and flow

Economics, business, accounting, and related fields often distinguish between quantities which are stocks and those which are flows. A stock variable is measured at one specific time, and represents a quantity existing at that point in time, which may have been capital accumulation in the past....
 of capital.






Discussion
Ask a question about 'Fixed investment'
Start a new discussion about 'Fixed investment'
Answer questions from other users
Full Discussion Forum



Encyclopedia


Fixed investment in economics
Economics

File:Ballard Farmers' Market - vegetables.jpgEconomics is the Social sciences that studies the Production theory basics, Distribution , and Consumption of Good and Service ....
 refers to investment in fixed capital
Fixed capital

Fixed capital is a concept in economics and accounting, first theoretically analysed in some depth by the economist David Ricardo. It refers to any kind of real or physical capital that is not used up in the production of a product and is contrasted with circulating capital such as raw materials, operating expenses and the like....
, i.e. tangible capital goods (real means of production
Means of production

Means of production , include machines, tools, plant and equipment, infrastructure, and so on: "all those things with the aid of which man acts upon the subject of labor, and transforms it." ....
 or residential buildings), or to the replacement of depreciated
Depreciation

Depreciation is a term used in accounting, economics and finance to spread the cost of an asset over the span of several years.In simple words we can say that depreciation is the reduction in the value of an asset due to usage, passage of time, wear and tear, technological outdating or obsolescence, depletion, inadequacy, rot, rust, decay o...
 capital goods.

Thus, fixed investment is investment in physical assets such as machinery, land, buildings, installations, vehicles, or technology. Normally, a company balance sheet will state both the amount of expenditure on fixed assets during the quarter or year, and the total value of the stock of fixed assets owned.

Why fixed?


The use of the term "fixed" refers not so much to the asset being invested in "staying in one place", but to the circulation of flows
Stock and flow

Economics, business, accounting, and related fields often distinguish between quantities which are stocks and those which are flows. A stock variable is measured at one specific time, and represents a quantity existing at that point in time, which may have been capital accumulation in the past....
 of capital. Normally, for the purpose of accounting, fixed investment refers to physical assets held for one year or more. The investment capital is therefore fixed, in the sense that it is tied up in physical assets for a longer time, and thus cannot be used for other purposes. This contrasts with, for example, investment capital in the form of liquid bank deposits earning interest.

Measurement


The amount of fixed investment may be stated "gross" (before taking into account depreciation) or "net" (after depreciation). By subtracting disposals of fixed assets from additions to fixed assets in an accounting period, we obtain a measure of the net (fixed) capital formation.

In official statistics, attempts are often made to estimate the value of fixed capital
Fixed capital

Fixed capital is a concept in economics and accounting, first theoretically analysed in some depth by the economist David Ricardo. It refers to any kind of real or physical capital that is not used up in the production of a product and is contrasted with circulating capital such as raw materials, operating expenses and the like....
 assets in a nation, the value of their depreciation
Depreciation

Depreciation is a term used in accounting, economics and finance to spread the cost of an asset over the span of several years.In simple words we can say that depreciation is the reduction in the value of an asset due to usage, passage of time, wear and tear, technological outdating or obsolescence, depletion, inadequacy, rot, rust, decay o...
 (or Consumption of fixed capital
Consumption of fixed capital

Consumption of fixed capital is a term used in business accounts, tax assessments and national accounts for depreciation of fixed assets. CFC is used in preference to "depreciation" to emphasize that fixed capital is used up in the process of generating new output; CFC may include other costs incurred in using fixed assets beyond actual depr...
) and the value of Gross fixed capital formation
Gross fixed capital formation

Gross fixed capital formation is a macro-economics concept used in official national accounts such as the NIPAs and UNSNA since the 1930s. Statistically it measures the value of additions to fixed assets purchased by business, government and households less disposals of fixed assets sold off or scrapped....
 by sector and type of asset. Fixed assets depreciate in value over time, due to wear and tear and market obsolescence. At the end of their useful lifetime (perhaps 7-10 years), they possess only a scrap-value.

For statistical purposes, investment in fixed capital must be distinguished from investment in intermediate goods
Intermediate consumption

Intermediate consumption is an economic concept used in national accounts, such as the United Nations System of National Accounts and the US National Income and Product Accounts ....
. Unlike fixed assets, intermediate goods (for example, commodities like oil, electricity and grain) are completely used up in production (usually within a year).

Trends


The broad historical trends are:

  • fixed assets are replaced in a shorter and shorter time. Thus, for example, a type of machinery which in the 19th century might have a useful lifetime of 20 years is today scrapped after 10 years.


  • Many fixed assets have become cheaper to acquire, due to more efficient production methods. Thus, the same amount of capital can nowadays often buy a larger stock
    Stock and flow

    Economics, business, accounting, and related fields often distinguish between quantities which are stocks and those which are flows. A stock variable is measured at one specific time, and represents a quantity existing at that point in time, which may have been capital accumulation in the past....
     of fixed assets.


  • The average turnover time of fixed capital (the time it takes for its value to be recovered from sales) is decreasing. In part, this is due to the ability of businesses to write off their fixed assets for tax purposes at a quicker rate (the true depreciation rate and the legally permitted depreciation rate often diverge).


  • Fixed investments nowadays can be enormously large (for example, a nuclear power plant might be built for three billion dollars). This creates more risk and means that many financial guarantees and insurance arrangements become necessary. Likewise, investing decision making in these cases becomes highly sophisticated, involving such techniques as game theory
    Game theory

    Game theory is a branch of applied mathematics that is used in the social sciences , biology, engineering, political science, international relations, computer science , and philosophy....
    , decision theory
    Decision theory

    Decision theory in mathematics and statistics is concerned with identifying the values, uncertainty and other issues relevant in a given decision making and the resulting optimal decision....
    , financial modeling
    Financial modeling

    Financial modeling is the task of building an abstract representation of a financial decision making situation. This is a mathematical model, such as a computer simulation, designed to represent the performance of a financial asset or a portfolio, of a business, a project, or any other form of financial investment....
    , etc.


  • In the last two decades, the total amount of annual fixed investment in OECD countries has tended to stagnate or grow more slowly in real terms—the main growth areas have been investment in computers and the construction of buildings. Thus, an increasing portion of total capital is tied up not in physical capital goods, but in financial obligations. This trend is closely related to perceptions of investment risk
    Risk

    Risk is a concept that denotes the precise probability of specific eventualities. Technically, the notion of risk is independent from the notion of value and, as such, eventualities may have both beneficial and adverse consequences....
     and relative profitability, in a situation of sluggish growth in ordinary consumer demand. Globally, that means the growth in physical wealth is increasing at a slower rate, though nations with a superior trading position can of course amass more physical wealth, through importing.


  • The value of the housing stock and real estate generally has tended to grow much faster since the mid-1980s, suggesting to many commentators that it is "over-valued". The most likely reason is cheap credit making the acquisition of real estate easier, and thus strongly stimulating market demand for properties.


  • In the developed capitalist countries, the total stock of fixed capital tied up in residential buildings is nowadays larger than the total stock of fixed capital tied up in industries.


See also

  • Capex
  • Capital accumulation
    Capital accumulation

    Most generally, the accumulation of capital refers simply to the gathering or amassment of objects of value; the increase in wealth; or the creation of wealth....
  • Capital formation
    Capital formation

    Capital formation is a term used in national accounts statistics and macroeconomics. It basically refers to the net additions to the capital stock and flow in an accounting period, or, to the value of the increase of the capital stock; though it may occasionally also refer to the total stock of capital formed....
  • Consumption of fixed capital
    Consumption of fixed capital

    Consumption of fixed capital is a term used in business accounts, tax assessments and national accounts for depreciation of fixed assets. CFC is used in preference to "depreciation" to emphasize that fixed capital is used up in the process of generating new output; CFC may include other costs incurred in using fixed assets beyond actual depr...
  • Depreciation
    Depreciation

    Depreciation is a term used in accounting, economics and finance to spread the cost of an asset over the span of several years.In simple words we can say that depreciation is the reduction in the value of an asset due to usage, passage of time, wear and tear, technological outdating or obsolescence, depletion, inadequacy, rot, rust, decay o...
  • Fixed capital
    Fixed capital

    Fixed capital is a concept in economics and accounting, first theoretically analysed in some depth by the economist David Ricardo. It refers to any kind of real or physical capital that is not used up in the production of a product and is contrasted with circulating capital such as raw materials, operating expenses and the like....
  • Gross fixed capital formation
    Gross fixed capital formation

    Gross fixed capital formation is a macro-economics concept used in official national accounts such as the NIPAs and UNSNA since the 1930s. Statistically it measures the value of additions to fixed assets purchased by business, government and households less disposals of fixed assets sold off or scrapped....
  • Opex
  • Opportunity cost
    Opportunity cost

    Opportunity cost or economic opportunity loss is the value of the next best alternative foregone as the result of making a decision. Opportunity cost analysis is an important part of a company's decision-making processes but is not treated as an actual cost in any financial statement....
  • Sunk cost
    Sunk cost

    In economics and business decision-making, sunk costs are costs that cannot be recovered once they have been incurred. Sunk costs are sometimes contrasted with variable costs, which are the costs that will change due to the proposed course of action, and prospective costs which are costs that will be incurred if an action is taken....