If gross domestic capital formation equals depreciation, what happens to net domestic capital formation and the capital stock?
Answer and explanation
Correct answer: Net investment will be zero and the capital stock will generally remain unchanged
Net domestic capital formation equals gross domestic capital formation minus depreciation. If both amounts are equal, their difference is zero. Gross investment is then sufficient only to replace the capital consumed through wear and tear, so there is no net addition to the capital stock. Under the usual assumption that other factors are unchanged, the capital stock remains broadly constant. Hence, option B is correct.
Frequently asked questions
What is the correct answer to this question?
Net investment will be zero and the capital stock will generally remain unchanged
Why is this the correct answer?
Net domestic capital formation equals gross domestic capital formation minus depreciation. If both amounts are equal, their difference is zero. Gross investment is then sufficient only to replace the capital consumed through wear and tear, so there is no net addition to the capital stock. Under the usual assumption that other factors are unchanged, the capital stock remains broadly constant. Hence, option B is correct.
Which subject and chapter does this question cover?
This is a Class 11 Economics question. Chapter: National Income and Related Aggregates.
