In which situation is it most important to distinguish replacement investment from net investment?
Answer and explanation
Correct answer: When an old machine is replaced and extra capacity is also added
When an old machine is replaced and additional capacity is added, total investment contains two different parts. Replacement investment offsets depreciation and maintains existing capital, while the extra-capacity part increases the capital stock and represents net investment. Separating them explains why gross investment can exceed depreciation. Wages and consumer purchases are not the relevant capital-investment components.
Frequently asked questions
What is the correct answer to this question?
When an old machine is replaced and extra capacity is also added
Why is this the correct answer?
When an old machine is replaced and additional capacity is added, total investment contains two different parts. Replacement investment offsets depreciation and maintains existing capital, while the extra-capacity part increases the capital stock and represents net investment. Separating them explains why gross investment can exceed depreciation. Wages and consumer purchases are not the relevant capital-investment components.
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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