<P> Econometricians acknowledge that the value of fixed assets is almost impossible to measure accurately, because of the difficulty of obtaining a standard valuation for all assets . By implication, it is also almost impossible to obtain a reliable measure of the aggregate rate of profit on physical capital invested, i.e. the rate of return . Arguably though, the data do provide an "indicator" of the trend over time; using mathematical models one can estimate that the true rate is most likely to lie within certain quantitative limits . </P> <P> In recent times, Eurostat publishes the "business investment rate" (also called the "gross investment rate of non-financial corporations") in its quarterly sector accounts for the EU27 . This ratio is defined as gross fixed capital formation divided by gross value added, in other words the share of GFCF in gross product . It provides an indication of how much of the total factor income is reinvested in new fixed assets . Normally that ratio is about 20--23% of gross value - added . However, calling it the "business investment rate" or the "gross investment rate" is somewhat deceptive, since this indicator refers only to fixed investment, and more specifically, the net fixed investment (fixed assets bought, less disposals of fixed assets). The actual total funds which are spent by enterprises on investments, in gross terms, are much larger, both because enterprises invest in far more than fixed assets only (they also buy intermediate goods and services, and some financial assets), and because the total money they spend on buying fixed assets is larger than the same sum netted of asset disposals . The main reason why this Eurostat indicator is published is that it shows something about the longer - term expectations of enterprises . If business confidence is low, enterprises are less likely to tie up new earnings in additional fixed assets, which are usually held for a number of years . If, on the other hand, business confidence is buoyant, it is more likely that enterprises will spend more of their current earnings on longer - term investments in fixed assets . In turn, the rate at which enterprises invest earnings in longer - term assets is an indicator of business expansion--if the rate declines, then this typically lowers the rate of cumulative business expansion . For example, in the aftermath of the financial crisis of 2008 - 2009, the ratio dropped to slightly below 20% in Q1 2010 from a high of 23% in Q2 2008 . Although this 3% drop in the ratio may not seem so large, in reality it signifies a very large amount of money that was no longer spent . The reason is that the total gross investment and gross value - added for the European Union amount to trillions of euro's, while the total gross value - added also fell significantly in 2008 - 2010 . </P> <P> Differences in the investment rates between countries very often mirror different levels of economic development and catching - up processes . This may be illustrated for the example of the member states of the European Union . Since the beginning of the millennium the average ratio of GFCF to GDP fluctuates around 20% in the European Union of 27 member states as a whole (EU - 27). For some member states which accessed the Union in 2004 and later (mostly countries in central and eastern Europe where the level of GDP is still comparably low), the ratio rose to more than 25% in some years . When the consumption of fixed capital is deducted from the figures the resulting ratio of net fixed capital formation to net domestic product is around 8% for the average of the EU - 27; again substantially higher ratios of more than 15% can be observed for some of the new EU member states such as Spain . Higher investment rates in poorer countries will lead to more equivalent living condition across Europe in the long - term through accelerated economic growth and an improved equipment of the labour force with modern infrastructure and technology . The detailed data on which these observations were made can be downloaded from Eurostat's website . </P> <P> Infrastructure spending is considered government investment because it will usually save money in the long run, and thereby reduce the net present value of government liabilities . Spending on physical infrastructure in the U.S. returns an average of about $1.92 for each $1.00 spent on nonresidential construction because it is almost always less expensive to maintain than repair or replace once it has become unusable . Similarly, public subsidy of college tuition will increase the net present value of income tax receipts because college educated taxpayers earn much more than those without college education . Likewise, government spending on social infrastructure, such as preventative health care, can save several hundreds of billions of dollars per year in the U.S., because for example cancer patients are more likely to be diagnosed at Stage I where curative treatment is typically a few outpatient visits, instead of at Stage III or later in an emergency room where treatment can involve years of hospitalization and is often terminal . </P>

Gross capital formation as a percentage of gdp
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