If an economy has high gross investment but also very high depreciation, which measure shows real capital growth more clearly?
Answer and explanation
Correct answer: Net investment
A high gross investment figure does not necessarily mean that the capital stock has grown substantially, because much of it may replace assets consumed during the period. Net investment subtracts depreciation from gross investment and therefore shows the remaining addition to productive capital more clearly. Consumption and population are important variables, but neither directly measures the net change in capital stock.
Frequently asked questions
What is the correct answer to this question?
Net investment
Why is this the correct answer?
A high gross investment figure does not necessarily mean that the capital stock has grown substantially, because much of it may replace assets consumed during the period. Net investment subtracts depreciation from gross investment and therefore shows the remaining addition to productive capital more clearly. Consumption and population are important variables, but neither directly measures the net change in capital stock.
Which subject and chapter does this question cover?
This is a Class 11 Accountancy question. Chapter: Depreciation, Provisions, and Reserves.
