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Lecture 2b summary
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Summary of 15 pages for the course EKN 320 at UP (Lecture 2b summary)
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Lecture 2(b)Account 3 and 4 + NIPA accounts example
Account 3: Gross capital formation and financing thereof
- Reflects size and forms of capital formation and its sources of financing
- Final consumption expenditure by government and households → only records the
current spending (account 1)
o Any capital expenditure is excluded from the above groups in account 1 →
these capital expenditures are recorded as part of gross capital formation
- Gross capital formation → includes private and public expenditure on capital
goods
o Expenditure by producers (private and public) on a country’s production
and imports that are used as capital goods by adding it to existing
productive capacity
▪ Results in capital stock expansion
- Gross capital formation = gross fixed capital formation + changes in inventory
o Gross fixed capital formation → anything not consumable that is used for
business purposes, contributes towards the output of goods and serv ices
▪ Residential; non-residential buildings, construction, transport
equipment, machinery and other production goods
▪ Example of consumption good vs capital good
• Vehicle → used for own use = luxury consumable and durable
consumption product
• Vehicle → used to transport materials for a business = transport
equipment → recorded under gross fixed cap formation
o Change in inventories
▪ Change in the value of stock of businesses
• Includes unsold stock (final G&S), raw materials, work-in-
progress (WIP)
- Offset closing and opening balances = amount of investment happening in a
country in that year
o Flow variable → investment
o Stock variable → gross capital amounts at the start and end of the year
NOTE! Any Gross entry in the NIPA accounts includes consumption of fixed capital.
- Gross fixed capital formation (FCF) = amount spent before provision for
consumption of fixed capital (provision for depreciation)
o Net FCF = Gross FCF – consumption of fixed capital → gives an indication of
the net addition to capital stock
- Fixed capital formation (provision for depreciation) → book entry used to replace
existing cap stock when they become old, depleted, or obsolete
o Net FCF → net addition to the existing stock
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, - Gross savings = gross national disposable income – total final consumption
expenditure (all in account 2)
o Net savings → tax allowance and source of savings → money set aside to
replace capital with → part of potential capital formation not provided for
by consumption of fixed capital
o Gross savings → comprises the domestic sources of saving
- External sources of financing capital formation:
o Net capital sources → inflows (negative sign in account 3) or outflows
(positive sign in account 3)
▪ Supplement the existing sources of savings to finance capital
formation
o Gold and Foreign reserves (G&FR)
▪ Increases in G&FR = negative figure in account 3
▪ Decrease in G&FR = positive figure in account 3
Notes can only be purchased through the following details:
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