THE MEASUREMENT OF GROSS DOMESTIC FIXED CAPITAL FORMATION IN INDONESIA

Capital Stock Conference

March 1997


Agenda item III
THE MEASUREMENT OF
GROSS DOMESTIC FIXED CAPITAL
FORMATION IN INDONESIA
KUSMADI SALEH
CENTRAL BUREAU OF STATISTICS
Jakarta, March 1997
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THE MEASUREMENT OF GROSS DOMESTIC
FIXED CAPITAL FORMATION IN INDONESIA
I. INTRODUCTION
1. Economic theory as well as empirical experience confirm that the significant
differences in the level of economic development and rates of economic growth
among countries or in the same countries over time are, to a great extent,
interrelated with the differences that exist in the level and composition of the capital
stock. Ideally, capital stock is build-up by the accumulation of capital formation
regularly done. Therefore economists have for a long time used the estimate of
capital formation as well as capital stock in their analysis of the results of
productive activity. Estimate of the gross stock of capital assets and capital
formation are frequently used in determining the magnitude of and changes in
productive capacity.
The general theme of capital formation lies at the very centre of the problem of
development in developing countries. The so-called developing countries, as
compares with developed areas, are less equipped with capital in relation to their
population and natural resources.
2. The meaning of capital formation is that society does not apply the whole of its
current productive activity to the needs and desires of immediate consumption, but
directs a part of it to the making of capital goods such as: building and other
structure, plant and equipment, transport facilities, tools and instruments,
machines, and all the various forms of real capital that can so greatly increase the
efficacy of productive effort. The term is sometimes used to cover human as well
as material capital, which include investment in skills, education and health.
However, this paper would rather limit the discussion to the problems of capital
formation in developing countries; with special reference to the estimation of gross
domestic fixed capital formation (GDFCF) of Indonesia, in a summary fashion.
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II. CONCEPT AND DEFINITION
3. Final consumption expenditure on gross domestic product (GDP) consists of
goods and services used by individual households or the community, government,
producers to satisfy their individual or collective needs and wants. One of the
component of GDP expenditure is GDFCF. The activity of gross domestic fixed
capital formation is restricted to institutional units in their capacity as producers,
being defined as the value of their acquisitions less disposals of fixed assets. Fixed
assets are produced assets; mostly machinery, equipment, buildings or other
structures but also including some intangible assets, that are used repeatedly or
continuously in production over several accounting periods (usually more than one
year).
4. The general nature and purpose of the distinction between GDFCF and
consumption, whether intermediate or final, is clear. The distinction is fundamental
for economic analysis and policy-making, Nevertheless, the borderline between
consumption and GDFCF is not always easy to determine in practice, certain
activities contain some elements that appear to be consumption and at the same
time appear to be capital formation. In order to try to ensure that the system is
implemented in a uniform way decision have to be taken about ways in which
certain difficult items are to be classified. Following are some examples.
Expenditures on training and research or development do not lead to the
acquisition of assets that can be easily identified, quantified and valued for balance
sheet purposes. Such expenditures continue to be classified as intermediate
consumption, therefore, eventhough it is recognized that they may bring future
benefits. Another example of the intrinsic difficulty of trying to draw a dichotomy
between consumption and gross fixed capital formation is provided by repairs and
maintenance. Ordinary maintenance and repairs undertaken by establishments to
keep fixed assets in good working order are intermediate consumption. However,
major improvements, additions or extensions to fixed assets, both machinery and
structures, increase their capacity or prolong their expected working lives count as
GDFCF.
5. GDFCF is measurement by the total value of a producer's acquisition, less
disposals, of fixed assets during the accounting period plus certain additions to the
value of non-produced assets realised by the productive activity of institutional
units. Fixed assets are tangible or intangible assets produced as outputs from
processes of production that are themselves used repeatedly or continuously in
other processes of production for more than one year.
6. There is substantial diversity in the different type of GDFCF that may take
place. The following main types may be distinguished:
(1) Acquisitions less disposals, of new or existing tangible fixed assets, subdivided
by type of asset into: (a) Dwellings; (b) Other buildings and structures: (c)
Machinery and equipment; (d) Cultivated assets.
(2) Acquisitions, less disposals, of new and existing intangible fixed assets,
subdivided by type of asset into: (a) Mineral exploration; (b) Computer software, (c)
Entertainment; literary or artistic assets.
(3) Major improvements to tangible non-produced assets including land.
(4) Cost associated with the transfers of ownership on non-produced assets.
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7. The ideal approach to estimate of GDFCF is the direct methods mentioned
earlier. The value of the acquisitions less disposals of fixed assets of a producers is
given by the sum of: (i) Value of fixed assets purchased; (ii) Value of fixed assets
acquired through barter; (iii) Value of fixed assets received as capital transfers in
kind; (iv) Value of fixed assets retained by their producers for their own use,
including the value of any fixed assets being produced on own account that are not
yet completed or fully mature; less sum of: (v) Value of existing fixed assets sold;
(vi) Value of existing assets surrendered in barter; (vii) Value of existing fixed
assets surrendered as capital transfers in kind.
8. Different method to estimate the GDFCF is also operationally feasible, namely
the commodity flow approach. The approach utilized data on the supply of
materials or goods intended for use as fixed capital formation. The value of
domestically produced capital goods used for capital formation plus identified
imported capital goods, less export of capital goods will form the GDFCF of the
country.
III. THE INDONESIAN EXPERIENCE
9. In several areas of economic analysis there are discrepancies between
theoretical concepts and their empirical measurement. It is often insufficient simply
to describe what is to be measured; usually there must also be some notion of
intended use before a concept can be quantitatively defined in a suitable way. The
actual choice of methods adopted, however, tends to be conditioned by the
availability of data and this sometimes implies the use of approximate estimates
that may impart an unintentional distortion.
10. The Indonesian GDFCF consist of the acquisition of new capital goods
domestically produced, and new or second-hand capital goods imported from
abroad. Capital goods are buildings and structure, and machinery and equipment
used in the process of production of Indonesian economy. The method applied to
estimate GDFCF of Indonesia is commodity flow approach. This approach utilized
the data on supply of goods (fixed assets) intended for capital formation.
Manufacturing Industries statistics and Foreign Trade statistics are the main
sources of data for the measurement of GDFCF. Beside, information and
parameters also derived from various special surveys designed for the compilation
of GDP, Input-Output Table, Social Accounting Matrix, Flow of Funds Accounts and
other related macro economic indicators.
11. Fixed Capital Formation in the Form of Building and Structures
Buildings and structures as capital goods are the output of construction sector. This
output is calculated by the sum of the value of material input for the construction of
buildings and structures, and expenses on services and primary input (gross value
added) of the sector. Included in construction materials are machineries and
equipments directly installed in construction/building.
To obtain the value of building materials at the location of construction activities,
transport costs and trade margins should be added. Construction material
originating from domestic production consist of agricultural products, such as,
bamboo and wood, mining and quarrying products, such as sand, stone, asphalt,
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etc.; and manufacturing product of construction materials. The construction
materials from import are usually the products of manufacturing industry.
12. The ratio of the construction material utilized for construction activities and the
trade and transport margin for the respective commodities, are obtained from a
special survey. Other costs, as a certain percentage of the value of all the above
mentioned materials, and the value added ratio, are also obtained from special
survey.
13. Fixed Capital Formation in the Form of Machinery and Equipment
Data on value of machinery and equipment for fixed formation, originating either
from import or domestic production are available annually from the Import and
Manufacturing Statistics. To obtain the value of machinery and equipment at user's
location, the trade and transport margin as well as other cost must be added. For
commodities used both as capital and for other purposes, the value is split up using
the ratio of capital goods obtained from a special survey.
14. Estimation of Capital Formation at Constant 1993 Prices
Capital formation, in the form of construction at constant prices, is based on the
construction sector output at 1993 constant market prices, for which the calculation
is separated for each component. Construction materials of domestic
manufacturing production and several other commodities are calculated by
extrapolation, using the production indices of the respective types of goods as the
extrapolator.
Meanwhile, for imported construction materials, the calculation is conducted by
using the wholesale price index of imported construction materials as the deflator.
Further, the value of capital formation in the form of domestically manufacture
machineries and equipments at 1993 constant market prices is calculated by
extrapolation, using production indices of the respective types of goods as the
extrapolators, whereas for the imported ones it is conducted by deflation, using
import price index as the deflator.
15. The effort to measure GDFCF of Indonesia using direct method has been
started for several sectors such as Large and Medium Manufacturing Industry,
Mining, and Construction sector from which the data on establishment report
available annually. The report elaborate output and input structure at current price
of the respective sector. Those information derived from the result of Economic
Census 1986 and will be available from the coming Economic Census 1996.
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REFERENCES
1. UNITED NATIONS,
System of National Accounts 1993, New
York 1993
2. Michael Ward,
The Measurement of Capital, OECD Paris 1976
3. Central Bureau
Indonesian Input-Output Table, 1990,
of Statistics
Jakarta 1993
4. Central Bureau
National Income of Indonesia 1988-1993,
of Statistics,
Jakarta 1994

5. Central Bureau
Survey of Large & Medium Manufacturing
of Statistics,
Industries, various volume, 1986-1992
6. Central Bureau
I-O 1993 UPDATED (Unpublished
of Statistics
materials)
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Table 1. GDFC OF INDONESIA AT CURRENT MARKET PRICES
(Billion Rupiahs)
Type of fixed asets
1991
1992
1993
1994
1995
1996
1. Building and Structures
39,469.20
46,772.32
62,176.87
77,042.82
94,485.09
115,951.61
2. Machinery and
19,280.87
17,625.04
16,181.76
17,476.71
21,360.27
26,280.31
Equipment
3. Transportation
6,109.99
4,901.23
4,951.67
7,023.56
8,559.36
6,710.22
4. Others
2,627.67
3,457.79
3,356.98
3,837.51
5,486.11
12,455.83
Total
67,487.73
72,774.38
86,667.28
105,380.59
129,890.82
161,397.96
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Table 2. GDFC OF INDONESIA AT CONSTANT MARKET PRICES
(Billion Rupiahs)
Type of fixed asets
1991
1992
1993
1994
1995
1996
1. Building and
48,507.85
54,537.30
62,176.87
71,013.92
80,187.40
90,109.38
Structures
2. Machinery and
20,442.91
17,969.53
16,181.76
17,173.78
20,051.49
24,388.02
Equipment
3. Transportation
6,681.94
5,160.69
4,951.67
6,706.57
7,669.59
5,914.33
4. Others
2,854.97
3,634.15
3,356.98
3,694.69
5,031.93
11,101.18
Total
78,487.67
81,301.67
86,667.28
98,588.96
112,940.42
131,512.92
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