Gross investment and depreciation

Correct answer: A. Total investment in goods and capital assets across the whole economy

Explanation: Aggregate investment is the total expenditure on capital goods and inventories by all sectors of an economy during a specified period. It may include machinery, buildings, equipment and changes in stocks. A single person’s purchase, one firm’s investment or shop rent is not the economy-wide aggregate. Hence A is correct.

Correct answer: A. Total expenditure on capital goods during a period

Explanation: Gross investment means the total expenditure on capital goods, such as machines, buildings, equipment, and inventories, during a specified period. It includes spending that replaces worn-out capital as well as spending that adds new capital. Therefore depreciation is not subtracted from gross investment; net investment is obtained only after deducting depreciation.

Correct answer: C. Depreciation

Explanation: Net investment measures the addition to the capital stock after allowing for the capital that has worn out or lost value. Therefore depreciation is subtracted from gross investment. The identity is: Net Investment = Gross Investment − Depreciation. National income, consumption expenditure, and exports do not represent the deduction required in this calculation.

Correct answer: D. Zero

Explanation: Net investment is calculated as gross investment minus depreciation. If the two amounts are equal, the subtraction leaves zero: Net Investment = Gross Investment − Depreciation = 0. This means new investment only replaces the capital consumed through depreciation and does not create an additional net increase in the capital stock.

Correct answer: A. Net increase in capital stock

Explanation: Net investment shows the actual addition to the economy’s capital stock after allowing for depreciation. It is calculated as gross investment minus consumption of fixed capital. A positive value indicates that capital stock has increased, zero indicates replacement of depreciated capital, and a negative value indicates that depreciation has exceeded gross investment.

Correct answer: B. Depreciation

Explanation: The difference between gross and net investment is depreciation. Gross investment includes total spending on capital goods, including replacement investment. When depreciation is deducted from gross investment, the remaining amount is net investment. Thus the identity is Net Investment = Gross Investment − Depreciation, while wages, saving, and taxes do not define this difference.

Correct answer: C. Positive

Explanation: Net investment equals gross investment minus depreciation. When gross investment is greater than depreciation, the difference is positive. This means investment is sufficient not only to replace worn-out capital but also to add to the capital stock. Therefore positive net investment can increase productive capacity, although the actual outcome may also depend on other economic conditions.

Correct answer: D. Negative

Explanation: Net investment is obtained by subtracting depreciation from gross investment. If gross investment is smaller than depreciation, the result is negative. This indicates that replacement investment is insufficient to cover the capital consumed during the period, so the economy’s capital stock may decline and productive capacity may weaken.

Correct answer: A. Gross investment

Explanation: A new machine is a capital good used to produce goods and services over more than one period. Expenditure on acquiring it therefore adds to gross investment. Gross investment includes both new capital formation and replacement of depreciated capital. Depreciation is the loss in value of existing capital, while final consumption and transfer payments do not create productive capital.

Correct answer: B. Depreciation

Explanation: The fall in the value and productive capacity of an old machine caused by use, age, and wear and tear is depreciation. Gross investment concerns total spending on capital goods, especially new or replacement capital, whereas depreciation records the amount of existing fixed capital consumed in production. Hence option B is the only correct classification.

Correct answer: C. Gross Investment = Net Investment + Depreciation

Explanation: Since net investment is obtained after deducting depreciation from gross investment, rearranging the identity gives Gross Investment = Net Investment + Depreciation. Gross investment therefore includes the net addition to capital as well as the amount required to replace capital consumed through wear and tear. The other equations describe unrelated aggregates or use the wrong sign.

Correct answer: A. Net Investment = Gross Investment − Depreciation

Explanation: Net investment measures the addition to capital after accounting for the fixed capital consumed during the period. Therefore the correct formula is Net Investment = Gross Investment − Depreciation. If depreciation is high, net investment is smaller; if it exceeds gross investment, net investment becomes negative. The other options do not represent this accounting relationship.

Correct answer: B. 80

Explanation: Use the identity Net Investment = Gross Investment − Depreciation. Substituting the given values gives 100 − 20 = 80. Thus net investment is 80. The depreciation amount is not added because it represents the value of capital consumed; gross investment includes replacement spending, while net investment shows the remaining addition to capital stock.

Correct answer: C. 40

Explanation: Rearrange the basic identity: Gross Investment = Net Investment + Depreciation. Therefore, Gross Investment = 30 + 10 = 40. The value 30 is only the net addition to capital. Gross investment must also include the expenditure needed to replace the capital consumed through depreciation, which is why 10 is added.

Correct answer: D. 10

Explanation: From Net Investment = Gross Investment − Depreciation, depreciation can be found as Gross Investment − Net Investment. Substituting the values gives 50 − 40 = 10. Therefore depreciation is 10. This amount represents the portion of gross investment that replaces the value of capital consumed through use, ageing, or obsolescence.

Correct answer: A. Gross investment is greater than depreciation

Explanation: Capital stock increases when net investment is positive. Since Net Investment = Gross Investment − Depreciation, gross investment must exceed depreciation for this to happen. In that situation, investment first replaces the capital consumed during production and then adds extra capital. The other situations produce zero or negative net investment and cannot normally increase capital stock.

Correct answer: B. Depreciation is greater than gross investment

Explanation: Capital stock can decrease when depreciation exceeds gross investment. The formula Net Investment = Gross Investment − Depreciation then produces a negative value. Investment is not sufficient to replace the capital consumed during the period, so the economy ends with less productive capital than before. Positive net investment, by contrast, increases the capital stock.

Correct answer: A. Use of a machine and the effect of time

Explanation: Regular use and the passage of time reduce the efficiency, value, and productive capacity of machines and other fixed assets. Obsolescence caused by newer technology can also produce depreciation. A fall in tax, higher saving, or population growth may affect other economic variables, but none is the direct physical or economic cause of depreciation of a machine.

Correct answer: B. Net investment and depreciation

Explanation: Gross investment consists of net investment plus depreciation. Net investment represents the additional capital created, while depreciation represents the capital that must be replaced because it has been consumed or has lost value. Thus gross investment covers both replacement investment and new investment. Wages and consumption are not components of this specific accounting identity.

Correct answer: C. Both will be equal

Explanation: The formula is Net Investment = Gross Investment − Depreciation. When depreciation is zero, nothing is deducted from gross investment, so net investment equals gross investment. This conclusion concerns their numerical relationship; it does not mean that gross investment itself must be zero. The amount of investment may be positive, but both measures will have the same value.

Correct answer: D. It reduces it

Explanation: Depreciation represents the loss of value and productive capacity of fixed capital because of use, ageing, or obsolescence. Therefore, considered by itself, it reduces the capital stock. Whether the total capital stock finally rises, remains unchanged, or falls depends on the comparison between gross investment and depreciation: positive net investment raises it, zero net investment maintains it, and negative net investment lowers it.

Correct answer: B. Depreciation is greater than gross investment

Explanation: Net investment is calculated as gross investment minus depreciation. If depreciation is greater than gross investment, the subtraction gives a negative result. This means the capital lost through wear, ageing, or obsolescence is larger than the new capital added. Option A would produce positive net investment, while option D would produce zero net investment because the two amounts would be equal.

Correct answer: A. Gross investment is greater than depreciation

Explanation: Net investment equals gross investment minus depreciation. It is positive only when the amount of new capital purchased or created is greater than the capital value lost through depreciation. Therefore, gross investment must exceed depreciation. Equality would make net investment zero, whereas a smaller gross investment would make it negative. Hence option A is the only correct statement.

Correct answer: A. Net investment = Gross investment − Depreciation

Explanation: The accounting relationship is net investment = gross investment − depreciation. Gross investment represents total investment in capital goods, including investment that replaces worn-out capital. After depreciation is deducted, the remaining amount shows the net addition to the capital stock. The other statements either deny the relationship, confuse investment with consumption, or incorrectly claim that net investment must exceed gross investment.

Correct answer: A. A fall in the value of capital goods

Explanation: Depreciation is the reduction in the value or productive capacity of fixed capital goods over time. It may result from regular use, physical wear and tear, ageing, or technological obsolescence. Machines, buildings, and equipment can depreciate. Wages, taxes, and population are different economic variables and do not define the decline in the value of capital goods.