1370.0 - Measuring Australia's Progress, 2002

ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 19/06/2002

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Contents >> The supplementary commentaries >> Capital formation

Capital formation (commonly termed 'investment') is the process of creating fixed assets - such as machinery and buildings - that can be used for production of goods and services. Capital formation is a key influence on Australia's capacity to generate income in the future.

Real gross fixed capital formation per capita grew strongly during most of the 1990s. Between 1990-91 and 2000-01 it rose by 3.1% a year on average. During the past decade, private sector capital formation accounted for around four-fifths of the total. Purchases of information technology (including computer hardware and software) are among the fastest growing components.(SEE FOOTNOTE 1)

Gross fixed capital formation is the value of acquisitions less disposals of new or existing fixed assets. The measure is 'gross' because it has not been adjusted for depreciation (the consumption of fixed assets during the production process). (See box.)

TRENDS IN CAPITAL FORMATION

Between 1990-91 and 1991-92, real gross capital formation per capita fell by more than 6%. This was associated with the recession experienced by Australia in the late 1980s and early 1990s. However, capital formation recovered in 1992-93 and continued to increase through the remainder of the decade. Between 1992-93 and 2000-01, real gross capital formation per capita grew by almost 37%.

SOME DIFFERENCES WITHIN AUSTRALIA

During the past decade, there was strong growth in investment in dwellings (up 19% in real per capita terms between 1990-91 and 2000-01); investment in machinery and equipment also grew appreciably. By 2000-01, machinery and equipment accounted for about 36% of total private capital formation. Capital formation is undertaken by three sectors: general government, and private and public corporations.

Real gross fixed capital formation per capita(a)

Private real gross fixed capital formation per capita(a), by type of asset


			Average
			annual
	1990-91	2000-01	change
	$ per	$ per
Asset type	capita	capita	%

Dwellings	1,206	1,504	2.2
Other buildings & structures	1,010	958	-0.5
Machinery & equipment	1,217	2,212	6.2
Livestock	112	76	-3.9
Intangible fixed assets	165	612	14.0
Ownership transfer costs	374	420	1.2
Total	3,962	5,782	3.9

(a) Chain volume measures; reference year 1999-2000.
Source: Australian System of National Accounts.(SEE FOOTNOTE 1)

The private sector consistently contributed most to overall capital formation during the past decade. After an initial decrease in the early 1990s, private sector investment recovered and grew by 46% during the decade to 2000-01. The private sector's contribution to overall gross fixed capital formation rose from just over 74% in 1990-91 to about 82% in 2000-01. Government and public corporations made a smaller contribution to total real gross fixed capital formation per capita. Government investment accounted for about 12% of the total investment figure in 2000-01, while public corporations accounted for about 7%.

Investment patterns varied considerably from industry to industry during the 1990s. Real gross fixed capital formation in Communications rose by an average of almost 11% per year. Investment also increased substantially in Finance and insurance and Cultural and recreational services, both of which experienced growth of almost 10% a year.

Real gross fixed capital formation per capita(a), by sector
Graph - Real gross fixed capital formation per capita(a), by sector

GROSS VERSUS NET CAPITAL FORMATION

The headline indicator is capital formation gross of depreciation (called 'consumption of fixed capital' in the Australian System of National Accounts).

During the years 1990-91 to 2000-01, depreciation was equivalent to around 70.75% of gross capital formation.

A gross-of-depreciation measure is most suitable when one is analysing investment as a component of aggregate expenditure; a net measure is most suitable when one is analysing increases in the total stock of capital.

FACTORS INFLUENCING CHANGE

The economy's strong growth following the recession in the early part of the 1990s underpinned the increase in gross fixed capital formation in the 1990s.

Changes in technology, especially in information technology, have also influenced the increase in investment activity. For example, the computerisation of many manufacturing systems and processes may have driven increases in investment in machinery and equipment.

LINKS TO OTHER DIMENSIONS OF PROGRESS

Capital formation supports higher levels of production and income generation.

Gross fixed capital formation can be financed by either Australian saving or foreign saving.

See also the commentaries National income, National wealth, Saving, and Productivity.

FOOTNOTES

1 All data in this commentary are derived from Australian Bureau of Statistics 2001, Australian System of National Accounts 2000-01, Cat. no. 5204.0, ABS, Canberra.