Gross investment and depreciation

Correct answer: B. Capital stock is declining

Explanation: Net investment equals the change in capital stock after depreciation. If it is negative, depreciation is greater than the gross addition of capital, so the capital stock declines. This does not mean depreciation is zero or that productive capacity doubles. Option A describes positive net investment. The conclusion concerns the direction of capital-stock change, not a guaranteed change in total output.

Correct answer: B. Depreciation

Explanation: Maintaining productive capacity requires replacing the fixed capital consumed through normal use. Therefore, gross investment must be at least equal to depreciation. If it equals depreciation, net investment is zero and existing capacity is maintained; if it exceeds depreciation, capacity can expand. Consumption, taxes, and exports may affect the economy, but none is the replacement benchmark in this relationship.

Correct answer: C. Net capital formation is negative

Explanation: Net capital formation is calculated as gross capital formation minus depreciation. When gross investment is smaller than depreciation, this difference is negative. That means investment does not fully replace the capital consumed during the period, so the capital stock falls. Gross capital formation is not zero merely because the net amount is negative; it can still be a positive investment amount.

Correct answer: A. Depreciation

Explanation: The fall in the value of a machine caused by normal use is depreciation, or consumption of fixed capital. The machine may continue producing goods even while its remaining value and service life decline. Net investment measures the overall change in capital after depreciation; it is not the loss itself. Exports and final consumption describe different economic flows and cannot represent this reduction in fixed-asset value.

Correct answer: C. 380

Explanation: The total expenditure of 600 represents gross investment. Of this, 220 merely replaces capital lost through wear and tear, so it does not create an additional net stock. The actual addition is therefore 600 − 220 = 380. Adding the amounts would count replacement twice, while 600 is the gross amount and 220 is only the replacement component, not the net increase.

Correct answer: B. Gross investment 150, depreciation 150

Explanation: Capital stock remains constant when net investment is zero. In option B, Net Investment = Gross Investment − Depreciation = 150 − 150 = 0. Thus, the entire gross investment replaces the capital consumed during the period, with no expansion. Options A and D produce positive net investment, while C produces negative net investment and therefore a decline in capital stock.

Correct answer: C. Gross investment = 120, depreciation = 160

Explanation: The change in capital stock is measured by net investment, which equals gross investment minus depreciation. In option C, net investment is 120 − 160 = −40. A negative net investment means that existing capital wears out faster than new capital is added, so the capital stock falls by 40 units. In A and D it rises, while in B it remains unchanged.

Correct answer: A. Depreciation is deducted

Explanation: A gross measure includes the value needed to replace capital that has worn out during production. Therefore, depreciation is deducted to obtain the corresponding net measure. For example, NDP = GDP − depreciation, and net investment = gross investment − depreciation. Taxes, consumption, and exports may matter in other calculations, but they are not the general gross-to-net adjustment.

Correct answer: C. 1,075

Explanation: NDP is obtained after depreciation has been deducted from GDP. Thus, to recover GDP from NDP, depreciation must be added back. GDP = NDP + depreciation = 950 + 125 = 1,075. Option A incorrectly subtracts depreciation, option B merely repeats NDP, and option D gives only depreciation. Therefore C is the only correct answer.

Correct answer: B. 240

Explanation: The accounting identity is gross investment = net investment + depreciation. Substitution gives gross investment = 0 + 240 = 240. This means that all investment is replacement investment: it compensates for worn-out capital but adds no extra capital stock. Thus zero net investment does not mean zero gross investment, making B correct.

Correct answer: C. −50

Explanation: Net investment is gross investment minus depreciation. Therefore, net investment = 0 − 50 = −50. No new capital is added, while existing capital continues to wear out, so the capital stock falls by 50 units. Zero gross investment does not imply zero depreciation; it only means that no new investment was made during the period.

Correct answer: B. It replaces worn-out capital

Explanation: Replacement investment is spending used to restore or replace capital that has worn out or depreciated. Its main purpose is to maintain existing productive capacity, not necessarily to expand it. When investment is exactly equal to depreciation, net investment is zero. Hence B correctly describes its role; the other options confuse investment with consumption or taxation.

Correct answer: B. Replacement investment

Explanation: A new machine with the same capacity restores the productive asset lost through wear and tear, but it does not increase capacity beyond the earlier level. Therefore, the expenditure is mainly replacement investment. Expansion investment would involve a larger productive capacity. Consumption expenditure and tax payment are different transactions and do not describe this capital purchase.

Correct answer: D. It is always equal to depreciation

Explanation: Net investment equals gross investment minus depreciation and therefore represents the net change in capital stock. It may be positive, zero, or negative. It is equal to depreciation only in a particular numerical situation, not as a general rule. Therefore D expresses the misunderstanding, while A, B, and C correctly describe net investment.

Correct answer: D. It is always less than net investment

Explanation: Gross investment includes the amount used to replace depreciated capital as well as any additional net investment. The identity is gross investment = net investment + depreciation. Since depreciation is non-negative, gross investment is generally equal to or greater than net investment, not always less. Thus D is the incorrect understanding.

Correct answer: B. 75

Explanation: A constant capital stock means that its net change is zero, so net investment is zero. Using gross investment = net investment + depreciation, gross investment = 0 + 75 = 75. This investment exactly replaces the capital lost through depreciation. If gross investment were zero, the capital stock would decline, so B is correct.

Correct answer: A. Depreciation is 0

Explanation: The accounting identity is: Gross Investment = Net Investment + Depreciation. Therefore, Depreciation = Gross Investment − Net Investment. Substituting the given values gives 90 − 90 = 0. Hence, option A is correct. Option B would imply gross investment of 180, while option C would imply gross investment of 270. Option D is also incorrect because net investment is explicitly given as 90, not zero.

Correct answer: A. Net investment measures the net increase in capital stock

Explanation: Net investment is the addition to capital stock after accounting for depreciation. Therefore, net investment of 45 means that capital stock has increased by 45 on a net basis. It does not imply that depreciation is zero, because gross investment could be larger than 45. It also rules out a decline in capital stock, making A the correct interpretation.

Correct answer: A. Depreciation is also very high

Explanation: Net investment is obtained by subtracting depreciation from gross investment. Therefore, a high gross investment can still produce a small net addition when depreciation is also high. For example, gross investment of 500 and depreciation of 480 leave net investment of only 20. With zero depreciation, net investment would equal gross investment, so A is correct.

Correct answer: C. Gross investment is less than depreciation

Explanation: A declining capital stock means that net investment is negative. Since net investment = gross investment − depreciation, it is negative only when gross investment is less than depreciation. If the two were equal, capital would remain constant; if gross investment were greater, capital would increase. Therefore C states the correct condition.

Correct answer: B. Gross investment = Depreciation

Explanation: Capital stock remains constant when its net change is zero. The formula is net investment = gross investment − depreciation. Setting net investment equal to zero gives gross investment − depreciation = 0, or gross investment = depreciation. Thus B is the general condition. A increases capital, C reduces it, and D is only a special case, not a necessary condition.

Correct answer: C. Gross investment > Depreciation

Explanation: Productive capacity increases when the capital stock receives a positive net addition. Since net investment = gross investment − depreciation, positive net investment requires gross investment to exceed depreciation. Equality merely maintains existing capacity, while a lower gross investment causes capital stock to fall. Therefore C is the correct condition for an increase.

Correct answer: A. Depreciation is 700

Explanation: Use the identity net investment = gross investment − depreciation. Rearranging gives depreciation = gross investment − net investment. Therefore depreciation = 1000 − 300 = 700. Option C repeats the net investment, D repeats the gross investment, and B results from adding the figures rather than finding their difference. Hence A is correct.

Correct answer: C. Gross 120, depreciation 180

Explanation: Net investment equals gross investment minus depreciation. In C, gross investment is positive at 120, but net investment is 120 − 180 = −60, because depreciation is larger. A gives +50, B gives zero, and D gives +180. Thus only C combines positive gross investment with negative net investment.

Correct answer: A. Adding depreciation to net investment gives gross investment

Explanation: The basic identity is gross investment = net investment + depreciation. Therefore, adding depreciation to net investment gives gross investment. The equivalent form is net investment = gross investment − depreciation. Option B reverses the operation, while C and D make unsupported ‘always’ claims. Hence A is the reliable rule for solving such questions.