What is gross capital formation and why is it a development indicator?

• A. The net increase in physical capital stock; a measure of investment in infrastructure
• B. The total value of all exports in a period
• C. The sum of government spending on social programs
• D. The depreciation of existing capital stock

Answer: (A)

Gross capital formation is the total investment in physical capital during a period. It captures the additions to the economy’s stock of capital—new buildings, machinery, equipment, and changes in inventories—showing how much is being invested to expand productive capacity. This is why it’s a development indicator: higher investment in capital stock signals potential for greater future production, productivity, and job creation, which are key drivers of long-term development. The choice describes investment as the net increase in physical capital stock and highlights infrastructure investment, which aligns with the idea of expanding capacity. Exports focus on trade, social-program spending centers on redistribution rather than capital growth, and depreciation reflects the wearing down of existing capital rather than new investment.