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Economic Indices

GFCF Gross Fixed Capital Formation

Gross Fixed Capital Formation (GFCF) is a long-standing meter of the value of acquisitions of assets minus disposals of fixed assets. As a component of GDP expenditure, it is a measure of added value from investment, as opposed to consumption, within an economy.

It is technically 'gross' because the measure does not deduct fixed capital consumption (i.e. fixed asset depreciation) from the investment calculation. Net Fixed Capital Formation, therefore, includes the depreciation of existing assets from fixed investment.

Care should be taken not to interpret GFCF as a measure of total investment. It is a measure of net additions to fixed assets.

GNI Gross National Income

GNI Gross National Income is a measure of the performance of a national economy. It is calculated from the total of the domestic and foreign output of residents, subtracting the domestic income of non-residents.

GNI is used by the European Union to determine the performance of member state economies, from which contributions to the EU budget are calculated, on the basis of a uniform percentage rate applied to the total of member states' GNIs. Currently, the average GNI is around € 25 000 per capita in Europe.

Analysts can gain an insight into national economic trends by comparing the GNI index with the GDP. Favourable GNI rates against GDP indicate a growth in capital creation. A decrease in the GNI/GDP ratio would indicate a 'leakage' of capital creation abroad.

Gini Coefficient

The Gini coefficient or ratio was created by Corrado Gini in 1912. It measures inequality through statistical dispersion, and is the most-used benchmark for income disparity within nations.

A Gini coefficient of one (100%) is a hypothetical situation where one person owns all wealth, and zero would be a perfectly equal distribution of all wealth.

Salient examples of Gini coefficients: OECD average: 33, USA: 41, UK: 33, Switzerland: 32, Germany: 30, Japan: 32, Mexico: 48. The OECD country with the lowest Gini coefficient is Slovenia: 25.6, and the highest is Chile: 50.

LDC: Less Developed Countries. A term now used in preference to 'Third World' to group countries which do not belong to the OECD, or which are not wealthy or industrialised.

MDC: More Developed Countries. A term used in preference to 'First World', or 'The West', to refer to OECD countries, or wealthy, industrialised nations.

Coase Theorem

Ronald Coase, 1910 - 2013, was a British economist and Nobel laureate (Economics, 1991). The Coase Theorem deals with the 'problem of externalities', the basis for the model of 'Polluter Pays'.

Ronald Coase is famous for what is generally referred to as the 'Coase Theorem', which deals with the 'problem of externalities', the basis for the model of 'Polluter Pays'.

Ronald Coase
Ronald Coase, 1910 - 2013, Nobel laureate 1991 for Economics

If there is no market for a good, such as clean drinking water from natural sources, there is no economic mechanism for its protection. Coase proposed an approach in which a market is created in these goods, enabling stakeholders to obtain bargaining power, and governments the means to impose control mechanisms.

Coase Bargaining graph
This graph illustrates the simple principle that initial pollution control investment usually results in cost-effective returns. Attempts to reduce pollution beyond point Q are inefficient in terms of the investment to returns ratio.

In pollution issues, it is often not clear who owns the good under threat, or the right to exploit or damage a common good, such as air and water. The victims of pollution may also be benefiting, as consumers or their employment, from the creation of the pollution.

The Coase Theorem proposes that there would be a point of maximum efficiency, where the marginal benefits of pollution control equal the marginal costs of pollution control. Up to that point, it is worth investing in reducing pollution or its effects; beyond the efficiency point, the costs outweigh the potential benefits.

Ronald Coase
Ronald Coase's ideas revolutionised the way bargaining was treated in environmental economic theory

Main areas of interest:

Seminal works

  • The Nature of the Firm: a 1937 article which deals with transaction costs. In this paper he discusses the limits of firms.
  • The Problem of Social Cost: a 1960 article which lays out the Coase Theorem, dealing with the issue of externalities in terms of property rights, the basis for the model of 'Polluter Pays'.

Quote: "If you torture the data enough, nature will always confess."

Content © Andrew Bone. All rights reserved. Created : January 25, 2016 Last updated :March 20, 2016

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