Capital Formation as a Flow

Capital formation refers to the process of increasing the stock of capital goods in an economy. It is the net addition to the existing stock of capital goods in a particular time period. Capital formation can be either gross or net. Gross capital formation refers to the total value of capital goods produced in an economy while net capital formation is the value of gross capital formation minus depreciation.

Capital formation is a flow because it happens over a period of time. It is not a static concept but rather a dynamic process that occurs continuously. Capital formation involves the creation of new capital goods, such as machinery, equipment, buildings, and infrastructure, as well as the replacement of old and worn-out capital goods. Therefore, capital formation is a flow concept that is measured over a specific period of time, usually a year.

Gross Domestic Capital Formation vs Gross Fixed Capital Formation

Gross domestic capital formation (GDCF) is the total value of all investments made in an economy during a particular period of time. GDCF includes investments made by both the private and public sectors in fixed assets such as machinery, equipment, buildings, and infrastructure.

Gross fixed capital formation (GFCF), on the other hand, refers only to the investment made in fixed assets by the private and public sectors. It does not include changes in inventories, which are considered as a part of the gross domestic product (GDP).

It is not always true that GDCF is greater than GFCF. In some cases, GFCF may be greater than GDCF, especially when there is a decrease in inventories. Therefore, option (a) is incorrect.

Nominal GDP vs Real GDP

Nominal GDP refers to the value of all goods and services produced in an economy during a particular period of time, measured at current market prices. Real GDP, on the other hand, is the value of all goods and services produced in an economy during a particular period of time, adjusted for inflation.

It is possible for nominal GDP to be less than real GDP if there is deflation in the economy. Deflation refers to a decrease in the general price level of goods and services. In such a case, the prices of goods and services will be lower than they were in the base year, resulting in a decrease in nominal GDP. Therefore, option (b) is incorrect.

Bread as a Consumer Good

Bread is a consumer good because it is a final good that is consumed directly by individuals for their personal satisfaction. Consumer goods are goods that are purchased by individuals for their own use and enjoyment. Bread is not a capital good because it is not used to produce other goods or services. Therefore, option (d) is incorrect.

Conclusion

The correct answer is option (c), which states that capital formation is a flow. Capital formation is a dynamic process that occurs continuously over a period of time. It involves the creation of new capital goods and the replacement of old and worn-out capital goods. Gross domestic capital formation and gross fixed capital formation are two different measures of investment in an economy, and it is not always true that GDCF is greater than GFCF. Nominal GDP can be less than real GDP if there is deflation in the economy. Bread is a consumer good because it is a final good that is consumed directly by individuals for their personal satisfaction.