If gross capital formation and depreciation are given, how will net capital formation be calculated?
Answer and explanation
Correct answer: By subtracting depreciation from gross capital formation
Gross capital formation includes both replacement of capital lost through depreciation and additional capital formation. Depreciation must therefore be subtracted to remove the replacement portion and identify the net addition to capital. The correct formula is Net capital formation = Gross capital formation − Depreciation. Adding depreciation would overstate the actual increase in productive capital.
Frequently asked questions
What is the correct answer to this question?
By subtracting depreciation from gross capital formation
Why is this the correct answer?
Gross capital formation includes both replacement of capital lost through depreciation and additional capital formation. Depreciation must therefore be subtracted to remove the replacement portion and identify the net addition to capital. The correct formula is Net capital formation = Gross capital formation − Depreciation. Adding depreciation would overstate the actual increase in productive capital.
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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