Gross investment and depreciation

Correct answer: A. −20

Explanation: Net investment is calculated as Gross investment − Depreciation. Therefore, 40 − 60 = −20. The negative sign means that depreciation exceeds new investment by 20 units, so the capital stock declines. The answer 20 gives only the size of the difference and wrongly drops its sign; 100 is the sum, while 60 is only the depreciation amount.

Correct answer: A. Gross investment is greater than depreciation

Explanation: Because Net investment = Gross investment − Depreciation, the result is positive only when gross investment is larger than depreciation. In that situation, investment first replaces worn-out capital and then adds some new capital. If depreciation is larger, net investment is negative; if both amounts are equal, net investment is zero. Thus option A states the required condition.

Correct answer: A. When depreciation is greater than gross investment

Explanation: Net investment becomes negative when depreciation is greater than gross investment. The formula makes this clear: Net investment = Gross investment − Depreciation. A larger depreciation deduction means that the economy loses more capital than it adds. Equal values give zero net investment, while gross investment greater than depreciation gives a positive result. Therefore, only option A fits the condition.

Correct answer: A. Gross investment

Explanation: A new factory building is a produced fixed asset used for future production. Expenditure on constructing it is therefore investment and, before deducting depreciation, forms part of gross investment. It is not household consumption or a tax payment. It is also not necessarily an import, because the building may be constructed domestically even if some materials or equipment are imported.

Correct answer: A. Buying a new machine

Explanation: A machine is a capital good because it is used repeatedly to produce goods or services. Buying a new machine is therefore investment; before deducting depreciation, it is included in gross investment. Eating rice, wearing ordinary clothes, and watching a film are consumption activities. They provide immediate or personal satisfaction rather than adding to the stock of productive fixed capital.

Correct answer: A. Capital good

Explanation: Depreciation is the decline in the value or productive capacity of a capital good over time because of use, ageing, or damage. Capital goods provide services over several periods, so their loss of value is measured. A sweet, bread, or tea consumed immediately is normally a consumption good and is used up directly, not treated as depreciating fixed capital.

Correct answer: A. It shows the net addition to capital stock

Explanation: Net investment shows how much the productive capital stock has actually increased after allowing for depreciation. A positive value indicates expansion of productive capacity, zero indicates that investment merely maintains the existing stock, and a negative value indicates a decline. Taxes, population, and imports are separate economic variables; they are not what net investment measures.

Correct answer: A. 0

Explanation: From Net investment = Gross investment − Depreciation, rearrange to get Depreciation = Gross investment − Net investment. Substitution gives 90 − 90 = 0. Therefore, the gross and net amounts are equal in this numerical case because no depreciation is being deducted. The value 180 is their sum, while 90 and −90 do not satisfy the accounting identity.

Correct answer: A. Gross investment

Explanation: The basic identity is Gross investment = Net investment + Depreciation. Net investment represents the new addition after depreciated capital has been replaced; adding the replacement amount back gives total investment before depreciation is deducted, namely gross investment. Consumption, saving, and taxes may appear in other national-income relationships, but they are not the result of this calculation.

Correct answer: A. Depreciation

Explanation: Depreciation refers to a decline in the value or productive capacity of a capital asset. Normal use causes wear and tear, and accidental damage can also reduce the machine’s usable value; in the context of this question, both represent loss of capital value. Tax payments, population growth, and consumption expenditure do not name this reduction in the machine’s value.

Correct answer: A. Net investment

Explanation: Gross investment first covers the replacement of capital lost through depreciation. The amount left after this replacement is net investment, and it creates a genuine new addition to the capital stock. Depreciation represents capital used up, while taxes and wages are payments or income components. They do not directly measure an increase in productive fixed assets, so net investment is the only correct option.

Correct answer: A. 30

Explanation: The difference between gross and net investment is precisely depreciation, because Net investment = Gross investment − Depreciation. Therefore, the difference here is 30. Net investment itself would be 120 − 30 = 90, but the question asks for the difference, not the net amount. The values 120 and 150 represent the gross amount and the sum, not the requested difference.

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

Explanation: The fundamental identity is Gross investment = Net investment + Depreciation. It can also be rearranged as Net investment = Gross investment − Depreciation. This means that total investment contains both the amount replacing worn-out capital and the amount adding new capital. The other equations combine unrelated variables such as consumption, taxes, population, income, and trade, so they have no relevant accounting meaning.

Correct answer: A. 75

Explanation: Use the standard formula Net investment = Gross investment − Depreciation. Substituting the figures gives 110 − 35 = 75, so the correct answer is 75. The value 145 comes from adding the figures, 35 is only depreciation, and 110 is the gross amount before depreciation is deducted. The positive result means that capital stock increases by 75 units after replacement is allowed for.

Correct answer: A. 25

Explanation: Starting with Gross investment = Net investment + Depreciation, rearrange it as Depreciation = Gross investment − Net investment. Thus, depreciation = 70 − 45 = 25. The value 115 is obtained by addition, while 45 and 70 are the given net and gross amounts rather than the difference between them. Therefore, option A is the only value consistent with the accounting identity.

Correct answer: A. When depreciation is high

Explanation: The relationship is Net Investment = Gross Investment − Depreciation. Rearranging it gives Gross Investment − Net Investment = Depreciation. Therefore, the gap between gross and net investment is determined directly by depreciation, and it becomes largest when depreciation is high. With zero depreciation, the gap would be zero; consumption expenditure and the absence of capital goods do not determine this accounting difference.

Correct answer: A. Replacement investment

Explanation: Replacement investment is expenditure used to replace capital goods that have worn out, become obsolete, or lost their productive usefulness. Its purpose is to maintain the existing productive capacity, not to create additional capacity. Private consumption, tax payments, and foreign grants are different economic transactions and do not specifically represent spending to replace depreciated capital.

Correct answer: A. Productive capacity may increase

Explanation: Positive net investment means that gross investment is greater than depreciation. After the capital lost through wear and tear is replaced, some additional capital remains, so the capital stock and potential productive capacity can increase. The word “may” is appropriate because actual output also depends on technology, management, labour, and how efficiently the new capital is used. Depreciation does not disappear.

Correct answer: B. Total capital addition including replacement

Explanation: Gross investment is the total expenditure on capital goods during a specified period. It includes replacement investment, which compensates for capital lost through depreciation, and net investment, which adds to the capital stock. Therefore, Gross Investment = Net Investment + Depreciation. Consumption and exports are not definitions of investment, and depreciation alone is only one component of gross investment.

Correct answer: B. By subtracting depreciation from gross investment

Explanation: Net investment measures the addition to the capital stock after allowing for capital goods that have worn out or depreciated during the period. Its formula is Net Investment = Gross Investment − Depreciation. Subtracting depreciation removes the replacement portion from total investment. Consumption, wages, and taxes are separate economic items and are not used in this calculation, so option B is correct.

Correct answer: C. ₹75 crore

Explanation: Use the formula Net Investment = Gross Investment − Depreciation. Substituting the given values gives ₹100 crore − ₹25 crore = ₹75 crore. Thus, after accounting for the capital worth ₹25 crore that has depreciated, the capital stock has a net addition of ₹75 crore. ₹125 crore would result from an incorrect addition, while ₹100 crore and ₹25 crore are merely the figures supplied in the question.

Correct answer: A. Zero

Explanation: Net Investment = Gross Investment − Depreciation. When gross investment and depreciation are equal, subtracting one from the other gives zero. This means that investment is just sufficient to replace the capital that has worn out, so the capital stock generally remains unchanged. Net investment would be positive only when gross investment exceeds depreciation, and negative when it is lower.

Correct answer: B. Capital stock will fall

Explanation: Net Investment = Gross Investment − Depreciation. If gross investment is smaller than depreciation, net investment is negative. This means that new investment is insufficient to replace all the capital that has worn out, so the capital stock declines. It would remain unchanged only when gross investment equalled depreciation, and it would rise when gross investment exceeded depreciation.

Correct answer: A. Covering depreciation

Explanation: Replacement investment is spending on replacing machines, buildings, or other fixed capital that has been used up, worn out, or made obsolete. It is therefore associated with covering depreciation and maintaining existing productive capacity. Increasing consumption, reducing taxes, and stopping imports may influence the economy, but none of them defines the purpose of replacement investment.

Correct answer: C. 20 crore

Explanation: Starting from Net Investment = Gross Investment − Depreciation, rearrange the formula to get Depreciation = Gross Investment − Net Investment. Therefore, depreciation = 60 crore − 40 crore = 20 crore. The values 60 crore and 40 crore are the given gross and net investments, respectively. The amount 100 crore is an irrelevant sum and does not represent depreciation.