If capital growth is reported without deducting depreciation from gross investment, what problem will arise?
Answer and explanation
Correct answer: Capital growth may be overstated
Gross investment includes spending that only replaces capital lost through wear, ageing, or obsolescence. If depreciation is not deducted, this replacement spending is wrongly counted as a fresh addition to capital. Consequently, reported capital growth may be overstated. The calculation error does not make gross investment negative or cause depreciation to disappear.
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What is the correct answer to this question?
Capital growth may be overstated
Why is this the correct answer?
Gross investment includes spending that only replaces capital lost through wear, ageing, or obsolescence. If depreciation is not deducted, this replacement spending is wrongly counted as a fresh addition to capital. Consequently, reported capital growth may be overstated. The calculation error does not make gross investment negative or cause depreciation to disappear.
Which subject and chapter does this question cover?
This is a Class 11 Economics question. Chapter: National Income and Related Aggregates.
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