Gross investment and depreciation

Depreciation is the amount of existing capital that must be replaced to maintain the capital stock. When gross investment is greater than depreciation, it first covers this replacement and leaves an excess. That excess is positive net investment and expands the capital stock. Equality only maintains the stock, while a smaller gross investment cannot fully replace the depreciated capital.

If investment does not cover depreciation, gross investment is less than depreciation. Applying Net investment = Gross investment − Depreciation therefore gives a negative result. More capital is being consumed through wear and obsolescence than is being added through new investment, so the capital stock is likely to decline. Positive net investment requires gross investment to exceed depreciation.

In national income accounting, depreciation records the estimated consumption of fixed capital during an accounting period. Machines, buildings and other fixed assets lose productive value through use, ageing or obsolescence. This amount is deducted from gross measures to obtain net measures. Depreciation is not household income, a government tax or the trade balance, which measures exports minus imports.

Net addition to capital is net investment, calculated as gross investment minus depreciation. Thus, net addition = ₹150 crore − ₹90 crore = ₹60 crore. The ₹90 crore figure represents capital consumed through depreciation, while ₹150 crore is the gross investment before that deduction. Adding the two amounts would incorrectly treat capital consumption as an additional investment.

Use the identity Gross investment = Net investment + Depreciation. With net investment equal to zero and depreciation equal to ₹40 crore, gross investment is 0 + ₹40 crore = ₹40 crore. All investment is therefore being used to replace capital consumed through depreciation, leaving no net expansion. An investment of ₹80 crore would instead create positive net investment of ₹40 crore.

The actual rise in capital stock is net investment. The relationship is net investment = gross investment − depreciation. Therefore, depreciation = 200 − 120 = 80 crore. This means 80 crore of gross investment replaced capital lost through wear or obsolescence, while the remaining 120 crore created a genuine addition to the capital stock. Thus option A is correct.

Net investment is calculated as gross investment minus depreciation. Here, gross investment is 70 lakh and depreciation is also 70 lakh, so net investment = 70 − 70 = zero. The firm has replaced the capital that wore out, but it has not added to its total capital stock. Depreciation is therefore not zero, and the net investment is neither positive nor negative.

Positive gross investment only means that some new capital has been purchased. The change in capital stock is determined by net investment = gross investment − depreciation. If gross investment is positive but smaller than depreciation, net investment is negative. Replacement is then incomplete, so the total capital stock falls. If investment exceeds depreciation, the stock instead rises.

The identity is net investment = gross investment − depreciation. When gross investment exceeds depreciation, subtraction leaves a positive amount. Investment first replaces capital that has worn out and then adds the excess to the capital stock. Equal amounts would produce zero net investment, while gross investment below depreciation would produce negative net investment. Therefore option A is correct.

When gross investment equals depreciation, net investment = gross investment − depreciation = zero. The investment is sufficient to replace machines, buildings, or other capital consumed during production, but nothing remains to expand the stock. Therefore the capital stock generally remains unchanged, although old assets may be replaced by newer assets and its composition may change.

Net investment is calculated as gross investment minus depreciation. If gross investment is smaller than depreciation, the result is negative. New capital purchases cannot fully replace the capital lost through wear, ageing, or obsolescence, so the total capital stock declines. This condition does not by itself imply anything about national income doubling or consumption becoming zero.

Use the formula net investment = gross investment − depreciation. Substituting the values gives 60 crore − 15 crore = 45 crore. The 15 crore is the amount of capital consumed, while 60 crore is the total investment before deduction. The remaining 45 crore is the positive addition to the capital stock after allowing for depreciation, so option B is correct.

Start with net investment = gross investment − depreciation. Rearranging gives gross investment = net investment + depreciation. Therefore, gross investment = 20 crore + 10 crore = 30 crore. The 20 crore is only the net addition to capital, and the extra 10 crore represents replacement of depreciated capital. Adding, rather than subtracting, is required when finding gross investment.

The relationship is net investment = gross investment − depreciation. Rearranging gives depreciation = gross investment − net investment. Thus depreciation = 90 crore − 55 crore = 35 crore. The 55 crore is the net addition after depreciation, whereas 90 crore is the total gross investment. Their difference, not their sum, measures the capital consumed.

Consumption of fixed capital is the national-accounting term for the decline in the value of fixed assets used in production during a period. This decline may result from normal wear, ageing, or obsolescence and is commonly called depreciation. It is not gross investment, which records capital purchases, and it has no direct meaning of net exports or personal income.

Buying a new machine to replace a worn-out one is replacement investment. Its purpose is to preserve existing productive capacity, not to create additional capacity. Expansion investment would involve acquiring capital beyond the amount needed for replacement. Household consumption concerns final use by households, while a transfer payment is not a purchase of a productive capital asset.

The standard relationship is NDP = GDP − consumption of fixed capital, where consumption of fixed capital means depreciation. Therefore, deducting depreciation from gross domestic product gives net domestic product. GNP requires an adjustment for net factor income from abroad, while personal and private income require further distribution and transfer adjustments. Thus only option A follows directly from the stated operation.

Gross national product measures final output produced by a country’s normal residents before deducting capital consumption. Subtracting depreciation from GNP gives net national product: NNP = GNP − depreciation. GDP is a domestic-boundary measure and cannot be obtained through this subtraction. Consumption expenditure and money supply are different economic aggregates and are unrelated to this direct calculation.

Technological progress can make an existing machine less efficient or less useful even when it still physically operates. The resulting loss of usefulness and value is called obsolescence, which is a cause of depreciation. Population growth, tax collection, and foreign trade may influence the economy, but they do not specifically make a capital asset technologically outdated.

Regular use causes physical wear and tear, reducing a machine’s efficiency, service life, and value. In national-income accounting, this reduction in the value of a fixed capital asset is called depreciation, or consumption of fixed capital. Inflation means a general rise in prices, while taxation and exports do not describe the use-related decline in a machine’s value.

Net investment equals gross investment minus depreciation. For the result to be positive, gross investment must be greater than depreciation. Investment first replaces capital that has been consumed, and the excess becomes a new addition to the capital stock. Equality would produce zero net investment, while a smaller gross investment would produce a negative result. Depreciation need not be negative.

Because net investment = gross investment − depreciation, a negative result occurs when gross investment is less than depreciation. New capital purchases then fail to replace the full value of capital worn out or made obsolete, causing the total capital stock to decline. If the two amounts were equal, net investment would be zero; if gross investment exceeded depreciation, it would be positive.

Set net investment equal to zero in the identity: 0 = gross investment − depreciation. Rearranging gives gross investment = depreciation. All new capital purchases then replace capital consumed through wear or obsolescence, leaving no net addition to the capital stock. Gross investment itself does not have to be zero; it may be positive and exactly equal to depreciation.

Depreciation measures the decline in the value or productive capacity of fixed capital goods because of use, ageing, or obsolescence. National accounts also call it consumption of fixed capital. Household consumption concerns goods and services used by families, wages are payments to labour, and money supply concerns currency and deposits. Therefore only option A describes depreciation.

If gross investment only covers depreciation, gross investment and depreciation are equal. Applying the formula net investment = gross investment − depreciation gives zero. The economy replaces the capital consumed during production but makes no additional capital formation. Net investment would be positive only if gross investment exceeded depreciation, and negative if it were insufficient for complete replacement.