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Capital Investment
Canadian Economy (NAICS 11-91)
Under this topic you will find information on annual and accumulated purchases of machinery and equipment and construction assets in the Canadian Economy (NAICS 11-91). This information can help you to gain insight into the rate of technological change, competitiveness and general health of the economy.
- Accumulated Capital Investment
- Annual Capital Investment
- Investment Ratio
- Important Notes on Capital Investment Data
- Understanding Capital Investment
Accumulated Capital Investment
Gross Capital Stock provides a measure of accumulated capital investment. Gross capital stock is the value of all fixed assets still in use, at the actual or estimated current purchasers’ prices for new assets of the same type, irrespective of the age of the assets. These data are therefore not adjusted for depreciation of assets, although assets that cease to exist (referred to as retirements) are deducted from the stock of capital.
Accumulated capital investment at the Canadian economy level reached $4,119.6 billion in 2011, up from $2,709.4 billion in 2002. An extended expansion phase in the Canadian economy and a prolonged period of low interest rates helped to push accumulated capital investment along at a compound annual growth rate of 4.8%. Between 2010 and 2011 the percentage increase was 4.2%.
| Type of Asset | Value in $ billions | CAGR** 2002-2011 |
% Change 2010-2011 |
|
|---|---|---|---|---|
| 2002 | 2011 | |||
|
*Year-End Gross Capital Stock (not depreciated). **Compound annual growth rate. Source: Statistics Canada, Fixed Capital Flows and Stocks, 2002 to 2011. |
||||
| Machinery and Equipment |
879.7 | 907.9 | 0.4% | -1.5% |
| Construction | 1,829.7 | 3,211.7 | 6.5% | 6.0% |
| Total | 2,709.4 | 4,119.6 | 4.8% | 4.2% |
Most of the growth in Canada’s accumulated stock of capital came from increases in the construction asset type, with investment increasing from $1,829.7 billion in 2002 to $3,211.7 billion in 2011. The compound annual growth rate for construction investment was 6.5%, with an increase (6.0%) occurring between 2010 and 2011.
Thanks in part to a shorter lifespan and lower annual investment levels, accumulated investment in machinery and equipment edged ahead to $907.9 billion in 2011 from $879.7 billion in 2002. Over the ten-year period, this translated into a compound annual growth rate of just 0.4%, with a decrease of 1.5% observed between 2010 and 2011.
Accumulated Capital Investment: 2002-2011
Canadian Economy (NAICS 11-91)
Source: Statistics Canada, Fixed Capital Flows and Stocks, 2002 to 2011.
Annual Capital Investment
Annual Capital Investment is a flow (in this case, over the course of a year) that adds to the stock of capital. In most cases, firms choose to invest when business conditions are favourable and real interest rates are lower. Therefore, in most cases, investment is higher in times of economic prosperity.
Annual investment in the Canadian economy grew from $159.3 billion in 2002 to $254.5 billion in 2011, or at a compound annual growth rate of 5.4%. The percentage change between 2010 and 2011 gives us an increase of 3.9%.
| Type of Asset | Value in $ billions | CAGR* 2002-2011 |
% Change 2010-2011 |
|
|---|---|---|---|---|
| 2002 | 2011 | |||
|
*Compound annual growth rate. Source: Statistics Canada, Fixed Capital Flows and Stocks, 2002 to 2011. |
||||
| Machinery and Equipment |
89.3 | 107.4 | 8.6% | 5.1% |
| Construction | 70.0 | 147.1 | 2.1% | 2.5% |
| Total | 159.3 | 254.5 | 5.4% | 3.9% |
Annual investment in machinery and equipment was up from $89.3 billion in 2002 to $107.4 billion in 2011. This translated to a compound annual growth rate of 8.6% over the ten-year period but we are seeing a increase of 5.1% between 2010 and 2011 which is reflected of enterprises keeping their machinery and equipment for longer in time of recession.
For construction assets, annual investment reached $147.1 billion in 2011, up from $70.0 billion in 2002. This translated into a compound annual growth rate of 2.1%. We see the same effect in construction were we have a overall annual growth but starting in 2011 we see a increase of 2.5%.
Annual Capital Investment: 2002-2011
Canadian Economy (NAICS 11-91)
Source: Statistics Canada, Fixed Capital Flows and Stocks, 2002 to 2011.
Investment Ratio
Another way to look at capital investment is to calculate a the ratio of annual investment to accumulated investment. Annual investment performs two functions: the replacement of capital stock which has been sold or depreciated to zero and enhancement of capital stock.
The degree to which capital stock must be replaced will depend upon how quickly technology changes, how much capital is available for investment and how competitive an industry is.
Firms normally choose to enhance their stock of capital during times of economic prosperity, when higher sales and lower interest rates make it profitable to do so.
The investment ratio for the Canadian Economy decreased from 5.9% in 2002 to 6.2% in 2011. The investment ratio for machinery and equipment increased from 10.2% in 2002 to 11.8% in 2011. Looking at building and engineering construction, the ratio was 3.8% in 2002 while in 2011 it reached 4.6%. Generally, construction does not require replacement as quickly as capital equipment, so the ratio will be lower for construction investment in most cases the recession and the tendency for companies to keep machinery and equipment for a longer period of time has changed in 2011, we are starting to see an increase in investment ratio in machinery and equipment
The graph below shows the changes in investment ratio for the Canadian Economy between 2002 and 2011.
Investment Ratio (%): 2002-2011
Canadian Economy (NAICS 11-91)
Derived from: Statistics Canada, Fixed Capital Flows and Stocks, 2002 to 2011.
Important Notes on Capital Investment Data
The data in this section come from Statistics Canada's Fixed Capital Flows and Stocks. Data are available for the years 2002-2011.
Accumulated investment is a gross measure, as depreciation is not subtracted from investment. Yearly deductions are made to gross stock to account for assets that cease to exist in that year.
Assets are broken into two categories: Machinery and Equipment and Construction. Only non-residential Construction is measured, and it includes both building construction (such as factories and offices) and engineering construction (such as roads and dams).
A more complete summary of Statistics Canada's Fixed Capital Stocks and Flows data, including criteria used to classify assets, is available in the Data Sources section of this site.
Understanding Capital Investment
To better understand the relationship between annual capital investment and accumulated capital investment, it is important to distinguish between stocks and flows.
A stock is a quantity that exists at a particular point in time. A flow is a quantity per unit of time (such as a year). The stock of capital (i.e. plant, equipment, buildings, tools, etc. used to produce goods and services) is changed by two flows: investment and depreciation.
Investment is the purchase of new capital, and thus investment increases the stock of capital. Depreciation decreases the stock of capital through wear and tear and the passage of time.
In Canadian Industry Statistics, accumulated capital investment can be viewed as the stock of capital being increased by the flow of annual capital investment. Accumulated investment is a gross measure, as depreciation is not subtracted from investment. Yearly deductions are made to gross stock to account for assets that cease to exist in that year.
With other factors held constant, the greater the expected profit rate from new capital, the greater is the amount of investment firms will undertake. The expected profit rate is influenced by the phase of the business cycle and advances in technology.
In a business cycle expansion the expected profit rate increases, and during a contraction it decreases. During an expansion sales and the rate at which firms use their capital yield a higher profit rate, while a contraction means lower sales, less efficient use of capital and a lower profit rate. As firms become more experienced in their use of new technology, they expect costs to fall and profits to increase.
Decisions to invest in capital are also influenced by interest rates, as the funds required to finance investment in capital are usually be borrowed, or drawn from the firm's retained earnings. In either case, higher interest rates mean a higher opportunity cost of investing funds in capital, and therefore, holding other factors constant, the lower the real interest rate the greater is the amount of capital investment.
Ultimately, firms will consider the expected profit rate and the real interest rate together when making decisions on capital investment in most cases. In some cases, however, factors like rapid technology advancement and the level of competition within an industry can force firms to invest in capital regardless of the profitability of the investment and the real interest rate.
In Canadian Industry Statistics, the measures of Accumulated Capital Investment and Annual Capital Investment are expressed in current dollars (i.e. the values are not adjusted to account for inflation). Both measures are broken down into two asset types: Machinery and Equipment and Construction. Only non-residential Construction is measured, and it includes to both building construction (such as factories and offices) and engineering construction (such as roads and dams).
