Gross investment and depreciation

To find net investment, start with total or gross investment and subtract the value of capital that has been used up during the period. Thus, net investment = gross investment − depreciation. Adding depreciation would make the result larger rather than remove the capital used up, and reversing the subtraction would change the sign. The consumption-and-income expression is unrelated.

In national income accounting, depreciation is also called consumption of fixed capital. The term refers to the value of fixed capital, such as machinery or buildings, used up during production. It does not mean household final consumption, national income, or income received from abroad. Those are separate aggregates and should not be substituted for the accounting measure of capital consumption.

A machine is a fixed capital asset. When regular operation causes physical wear and reduces its value or productive capacity, the reduction is called depreciation. Consumption generally refers to the use of goods and services to satisfy wants, while tax and export describe fiscal and trade activities. Therefore, depreciation is the precise term for the decline described in the question.

Gross investment is the total investment in capital goods during a period. It includes replacement investment that compensates for depreciation as well as investment that adds new productive capacity. Thus, the part of investment associated with replacing depreciated capital is included in gross investment. Taxes, wages, and imports may affect activity, but they are not themselves the defining components of gross investment.

Use the relationship net investment = gross investment − depreciation. Substituting the given values gives 100 − 20 = 80. Thus, 80 units represent the addition to capital after allowing for the 20 units of capital value used up. The answer 120 incorrectly adds depreciation, while 20 is only the depreciation amount and 100 is the original gross investment, not the net amount.

Starting with net investment = gross investment − depreciation, rearrange the equation to obtain gross investment = net investment + depreciation. Substituting the values gives 30 + 10 = 40. The value 20 comes from subtracting depreciation, while 30 and 10 are only the given net investment and depreciation amounts. Therefore, 40 is the only value consistent with the accounting relationship.

Depreciation applies mainly to fixed capital assets that are used repeatedly in production, such as machines, tools, buildings, and equipment. Their value or productive capacity declines over time because of use, ageing, or obsolescence. Cash, consumer goods, and population are not fixed capital assets in this accounting sense, so they are not the appropriate answer.

A machine is a capital good used to produce other goods and services. Purchasing a new machine adds to productive capacity or replaces old capital, so it is recorded as investment. It is not final household consumption, depreciation, or a tax payment. The exact effect on net investment depends on whether the purchase only replaces depreciated capital or adds capacity beyond the amount of depreciation.

When a firm buys capital goods merely to replace the productive capacity lost through wear and tear, the expenditure is replacement investment. It compensates for depreciation and is included in gross investment. It does not by itself represent household consumption, tax collection, or foreign trade. Only investment beyond the amount needed for replacement creates a positive net addition to the capital stock.

Net investment measures the change in capital stock after depreciation has been taken into account. If it is positive, new investment is greater than the capital value used up, so the economy or firm ends the period with a larger capital stock, other things remaining equal. Zero net investment would keep the stock broadly unchanged, while negative net investment would reduce it.

Zero net investment means gross investment is exactly equal to depreciation. The new investment is therefore just enough to replace the capital used up during the period, with no additional net capital formation. As a result, the capital stock generally remains unchanged or nearly constant, assuming no other adjustments are considered. It does not mean that the entire stock becomes zero.

Apply net investment = gross investment − depreciation. When depreciation is the larger amount, subtracting it from gross investment produces a negative value. This indicates that the economy or firm has lost more capital value than it has added through new investment. Equality would give zero, and a larger gross investment would give a positive result. Thus, option A follows directly from the formula.

Gross investment is the total investment in capital goods, whereas net investment is the amount left after deducting depreciation. Therefore, gross investment − net investment = depreciation. This difference represents the value of fixed capital used up during production. Taxes, wages, and interest may influence investment decisions, but they are not the accounting difference that converts gross investment into net investment.

Physical wear and tear caused by repeated use reduces the value or productive capacity of a machine, so it is a direct cause of depreciation. An increase in students, receiving wages, and a tax rebate may be social or financial events, but none describes the loss of value of a fixed capital asset. Therefore, only the machine’s wear and tear matches the concept.

A machine can lose value even without heavy physical use when newer technology makes it less useful or less competitive. This loss due to technological obsolescence is a form of depreciation in the value of fixed capital. Consumption, saving, and import describe different economic activities and do not name this decline in capital value. Hence depreciation is the correct answer.

Use gross investment = net investment + depreciation, or rearrange it as depreciation = gross investment − net investment. Substituting the values gives 50 − 35 = 15. Thus, 15 units of capital value were used up. The values 35 and 50 are the given net and gross amounts, while 85 incorrectly adds the two instead of finding the difference required for depreciation.

Net investment is found by subtracting depreciation from gross investment: net investment = 200 − 50 = 150. This means that after allowing for the 50 units of capital value used up through depreciation, 150 units remain as the net addition to capital. Adding the figures would give 250, but addition is used to find gross investment from net investment, not net investment from gross investment.

The relationship is net investment = gross investment − depreciation. To find gross investment, add depreciation to net investment: gross investment = 60 + 25 = 85. The value 35 would result from subtracting depreciation, but that operation does not recover the gross amount. Options 60 and 25 are only the separate values supplied in the question, so 85 is the unique correct answer.

Replacement investment is the part of gross investment used to replace capital goods that have worn out or lost productive capacity. It maintains the existing level of capital stock, but does not necessarily enlarge it. Consumption expenditure, tax payments, and salary payments are different economic transactions; they do not by themselves replace damaged or depreciated capital goods.

Net investment is the portion of gross investment left after deducting depreciation: Net investment = Gross investment − Depreciation. It represents the addition to the capital stock after worn-out capital has been replaced. Depreciation measures the capital used up, while consumption and taxes are not additions to productive capital. Thus, net investment is the relevant measure of capital growth.

Net investment equals gross investment minus depreciation. If depreciation is greater than gross investment, the loss of capital exceeds the new capital added, so net investment is negative and the capital stock falls. Positive net investment increases the stock, while zero net investment keeps it unchanged. Therefore, a declining capital stock is associated with negative net investment.

Depreciation represents the loss in value or productive capacity of a fixed capital asset because of normal wear and tear, ageing, or use. In national income accounting, depreciation is deducted from gross measures to obtain net measures. Household consumption, foreign travel, and census expenditure may be costs, but they are not the cost of using up a capital asset.

Gross investment can be viewed as having a replacement component and a net addition component. The replacement component equals depreciation because it replaces the capital lost through wear, use, or ageing. The remaining component is net investment, which adds to the capital stock. Taxes, wages, and profits are payment or income categories, not the replacement component of investment.

Replacement of old capital is measured by depreciation. Therefore, subtracting depreciation from gross investment gives net investment: Net investment = Gross investment − Depreciation. Net investment shows the new addition to productive capital after the existing stock has been maintained. Consumption, government debt, and exports are separate economic or national-accounting items and are not the remainder in this calculation.

Use the formula Net investment = Gross investment − Depreciation. Substituting the given values gives 75 − 75 = 0. This means that investment is exactly sufficient to replace the capital that has depreciated, so the capital stock does not increase or decrease. The value 150 comes from addition, 75 ignores depreciation, and −75 reverses the subtraction.