Gross investment and depreciation

Capital expansion refers to the addition to the capital stock after allowing for the wear and tear of existing capital; in this question, it is measured by net investment. Net investment = gross investment − depreciation = 700 − 280 = 420. Thus, option B is correct. Option C is only the depreciation amount, option D is gross investment, and option A results from adding rather than subtracting depreciation.

For net investment to be positive, gross investment must exceed depreciation. In option C, 130 − 90 = 40, which is positive. Option A gives −20, option B gives 0, and option D gives −10. Thus only option C shows an increase in the capital stock after accounting for capital consumed.

Replacing an old machine restores the productive capital that was worn out, but it does not add to the total capital capacity. Such spending is called replacement investment and forms the depreciation-covering part of gross investment. Net investment would require capacity or capital stock to rise beyond the amount replaced; the other options describe unrelated activities.

Rearrange the identity gross investment = net investment + depreciation. Depreciation therefore equals gross investment minus net investment. Since the stated difference is 90 crore, depreciation must be 90 crore. It need not equal net or gross investment unless additional numerical conditions are supplied, so the other options cannot be inferred.

Use gross investment = net investment + depreciation, so depreciation = gross investment − net investment. Substituting the data gives 700 crore − 200 crore = 500 crore. The answer is not 200 crore, which is net investment, and it is not 700 crore because depreciation is only the portion of gross investment used to replace consumed capital.

A positive net investment means that, after allowing for depreciation, gross investment still exceeds the capital consumed. Therefore the capital stock has increased, but only by the small positive amount stated. A fall would require negative net investment, and depreciation greater than gross investment would also make net investment negative. Gross investment cannot be zero with positive net investment.

Net investment is obtained by subtracting depreciation from gross investment. One-fourth of 1,200 is 1,200 ÷ 4 = 300, so depreciation is 300. Hence, net investment = 1,200 − 300 = 900. Option A is the depreciation amount itself, option D is the original gross investment, and option C incorrectly adds the two amounts.

Treat the machine expenditure as gross investment. Net investment = gross investment − depreciation = 300 lakh − 320 lakh = −20 lakh. The negative result means depreciation exceeded new investment, so the firm’s capital stock fell by 20 lakh on a net basis. It is neither positive nor zero, which rules out the other choices.

Gross investment contains both replacement investment and the additional investment that expands the capital stock. Subtracting depreciation removes the replacement requirement and leaves the net addition: net investment = gross investment − depreciation. Reversing the subtraction changes the sign, while the other expressions describe unrelated economic differences.

Gross investment is the total addition to capital goods during the period. One part replaces capital consumed through depreciation, and the other part is the net addition that expands the capital stock. Therefore gross investment = depreciation + net investment. Counting only one part would omit either replacement or expansion spending.

Consumption of fixed capital is the reduction in the value of fixed assets such as machines, buildings, vehicles, and equipment because of normal wear and tear, ageing, or obsolescence during production. In national income accounting, this reduction is commonly called depreciation. It is deducted from gross aggregates to obtain net aggregates.

The gradual loss in the productive value of a fixed asset due to physical wear, regular use, or obsolescence is called depreciation, also known as consumption of fixed capital. Depreciation is deducted from gross measures to obtain net measures, such as converting gross value added into net value added. Therefore, option C is correct.

Change in stock, or inventory investment, is calculated as closing stock minus opening stock. If closing stock is greater than opening stock, inventories have increased during the period, so the change is positive and is added to gross investment. If closing stock is lower, the change is negative and reduces investment; if both stocks are equal, the change is zero. Thus, option A is correct.

Net investment measures the addition to the capital stock after allowing for the capital that has worn out during the period. The formula is Net Investment = Gross Investment − Depreciation. Substituting the figures gives ₹900 crore − ₹160 crore = ₹740 crore. Hence option A is correct; ₹900 crore is gross investment and ₹160 crore is depreciation, not net investment.

A net aggregate is obtained by deducting depreciation, also called consumption of fixed capital, from the corresponding gross aggregate. Thus NNPMP = GNPMP − depreciation. Rearranging gives depreciation = GNPMP − NNPMP = ₹1,00,000 crore − ₹94,000 crore = ₹6,000 crore. Therefore, option A is correct; the other options confuse the gross and net totals with the deduction.

Net investment is calculated by subtracting depreciation, or capital consumption, from gross investment: Net investment = Gross investment − Depreciation. Therefore, ₹950 crore − ₹620 crore = ₹330 crore. Gross investment records the total addition to the capital stock, whereas net investment records the addition left after replacing worn-out or used-up capital. Hence option A is correct.

GDP measures the value of final goods and services produced within a country’s domestic territory, whereas GNP measures the income generated by the normal residents of a country. The conversion is made through net factor income from abroad (NFIA): GNP = GDP + NFIA. Depreciation and net indirect taxes change other aggregates, not the domestic-national distinction.

GDP is called a gross measure because it measures the value of domestic production before deducting depreciation, also called consumption of fixed capital. When depreciation is subtracted from GDP, the resulting aggregate is NDP. Thus, the word gross indicates that the loss in value of fixed capital used during production has not yet been deducted.

In national income accounting, gross means that depreciation, also called consumption of fixed capital, has not yet been deducted from the value of production. Thus GDP is a gross domestic measure, whereas NDP is obtained by subtracting depreciation from GDP. Gross does not indicate anything about NFIA or whether taxes are zero, so option A is correct.

Consumption of fixed capital is the national-accounting term for depreciation. It represents the value of wear, tear, and obsolescence of fixed assets such as machines, buildings, and vehicles during the production period. GDP is a gross measure because it includes this used-up capital. When depreciation is subtracted from GDP, the result is NDP, which measures production after allowing for the loss of fixed capital.

The word “gross” means that consumption of fixed capital, commonly called depreciation, has not been deducted from the value of domestic production. When depreciation is subtracted from GDP, the result is net domestic product (NDP). Exports, consumption and investment are components or entries in expenditure accounting, not the defining deduction that distinguishes gross from net.

NDP is calculated as GDP minus depreciation: NDP = GDP − depreciation. When GDP remains unchanged, an increase in depreciation raises the amount deducted from GDP. Therefore, NDP decreases by the same amount, other factors being unchanged. This shows why net output is lower than gross output when capital consumption is positive.

Depreciation is the loss in the value or productive capacity of a fixed capital good because of wear and tear, regular use, age, or obsolescence. A factory machine gradually wearing out is therefore a clear example. A rise in wheat prices, a wage increase, and a government subsidy are price or income changes, not physical consumption of capital.

Net investment measures the addition to the capital stock after allowing for the part of capital that has been used up or worn out during production. It is calculated by subtracting depreciation from gross investment: Net Investment = Gross Investment − Depreciation. Adding depreciation would produce an incorrect measure because it would count replacement of worn-out capital as a net addition.

Use the identity Net Investment = Gross Investment − Depreciation. Substituting the given values gives 120 crore rupees − 30 crore rupees = 90 crore rupees. Thus, after replacing the capital lost through wear and tear, the economy has added 90 crore rupees to its capital stock as net investment. Therefore, option D is correct.