How does accidental destruction of machinery due to an earthquake differ from normal depreciation?
Answer and explanation
Correct answer: Accidental loss is not treated as normal consumption of fixed capital
Normal depreciation, or consumption of fixed capital, is the expected decline in the value of a fixed asset through ordinary use, ageing and foreseeable obsolescence during production. An earthquake is an extraordinary event that destroys capital unexpectedly. Such a catastrophic loss is kept separate from normal depreciation and is not treated as ordinary consumption of fixed capital in calculating NDP.
Frequently asked questions
What is the correct answer to this question?
Accidental loss is not treated as normal consumption of fixed capital
Why is this the correct answer?
Normal depreciation, or consumption of fixed capital, is the expected decline in the value of a fixed asset through ordinary use, ageing and foreseeable obsolescence during production. An earthquake is an extraordinary event that destroys capital unexpectedly. Such a catastrophic loss is kept separate from normal depreciation and is not treated as ordinary consumption of fixed capital in calculating NDP.
Which subject and chapter does this question cover?
This is a Class 11 Economics question. Chapter: National Income and Related Aggregates.
