In which situation is the economy only replacing worn-out capital?
Answer and explanation
Correct answer: Gross investment is equal to depreciation
Replacement investment maintains the existing capital stock by covering the value of capital used up through depreciation. When gross investment exactly equals depreciation, the whole investment replaces worn-out capital and nothing remains for an additional increase. Thus net investment, calculated as gross investment minus depreciation, is zero. If gross investment exceeded depreciation, capital stock would rise.
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What is the correct answer to this question?
Gross investment is equal to depreciation
Why is this the correct answer?
Replacement investment maintains the existing capital stock by covering the value of capital used up through depreciation. When gross investment exactly equals depreciation, the whole investment replaces worn-out capital and nothing remains for an additional increase. Thus net investment, calculated as gross investment minus depreciation, is zero. If gross investment exceeded depreciation, capital stock would rise.
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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