The determination of investment by destination is a two-step procedure. First, IFs computes demand for investment by each sector (IFSDEM), responsive primarily to inventory levels. The base value of investment demand is dependent on the total level of gross capital formation (IGCF)—see its computation in the discussion of the social accounting matrix—and the portion of that directed into a particular sector (IDK) during the last time step. Parameters ( elinst1 and elinst2 ) control the speed of adjustment. Second, IFs normalizes those demands to the total level of gross capital formation.

where

The above equation handles the sectors other than agriculture and energy. The model for agriculture provides investment need for that sector (IANEED), as does the energy model (IENEED).

To obtain actual investment by destination (IDS) we can distribute total investment (I) across sectors proportionately to their demands.

As an indicator (and as the basis for sectoral investment splits in the next time cycle) we can compute the fractions going to each sector (IDK).

Capital stock (KS) in the next time period is simply the old capital stock plus investment by destination, minus depreciation (the capital stock divided by its lifetime, lks ), and minus the portion of capital destroyed as civilian damage (CIVDM) in war (see the policy model). The last term is, of course, normally zero.

IFs makes no effort to represent a gestation period for capital of more than 1 year. Although it would be desirable to do so, it would also require a "look ahead" capability of the model to plan capital requirements several years in the future. Such a feature would add some realistic cyclical behavior to the model, but would also be somewhat difficult to control. And it is not the aim of IFs to capture business cycles.