Gross investment and depreciation

Correct answer: A. Net addition to capital will appear higher than it actually is

Explanation: Gross investment includes spending that only replaces capital consumed through depreciation. The genuine addition is measured as Net Investment = Gross Investment − Depreciation. If depreciation is not deducted, replacement spending is mistakenly treated as new capital, so the increase in capital stock is overstated. This accounting error does not automatically change total output, population growth or the equality of exports and imports.

Correct answer: A. Net investment may fall

Explanation: Net investment equals gross investment minus depreciation. If depreciation rises while gross investment remains unchanged or does not rise sufficiently, the amount subtracted becomes larger and net investment falls. It may become zero when both amounts are equal or negative when depreciation exceeds gross investment. Therefore, the carefully worded answer “may fall” is correct; the absolute claims in the other options are false.

Correct answer: A. First find net investment, then see the effect on capital stock

Explanation: The key relationship is Net Investment = Gross Investment − Depreciation. Net investment shows the actual addition to, or reduction in, the capital stock after worn-out capital has been replaced. First perform the subtraction and then interpret the sign: a positive value increases capital, zero maintains it, and a negative value reduces it. Gross investment alone is not enough.

Correct answer: C. 200

Explanation: Start with Net Investment = Gross Investment − Depreciation. Substituting the values gives −40 = 160 − Depreciation. Rearranging, Depreciation = 160 − (−40) = 200 crore. The negative net investment means depreciation exceeded gross investment by 40 crore. If depreciation were 120, net investment would be positive 40, so that option cannot be correct.

Correct answer: C. 320

Explanation: A fall of 20 in capital stock means net investment is −20. Using Net Investment = Gross Investment − Depreciation, we have −20 = 300 − Depreciation. Hence depreciation = 300 + 20 = 320. Depreciation must exceed gross investment because the capital stock declined. Choosing 280 would imply a positive net addition of 20, contrary to the question.

Correct answer: C. When net investment is zero

Explanation: Gross investment consists of replacement investment plus net investment. If net investment is zero, gross investment exactly equals depreciation, so all investment merely replaces the capital consumed during the period. A positive net investment would include expansion, while a negative net investment would mean replacement was incomplete. If depreciation were zero, investment would generally be a net addition rather than replacement.

Correct answer: B. 120 and 180

Explanation: Replacement investment is equal to depreciation, so it is 120. Gross investment combines replacement investment and net investment: Gross Investment = Depreciation + Net Investment = 120 + 60 = 180. The word “respectively” asks for replacement investment first and gross investment second. Option A gives the wrong first value, while C and D use an incorrect order or relationship.

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

Explanation: The fundamental identity is Net Investment = Gross Investment − Depreciation. Rearranging it gives Gross Investment = Net Investment + Depreciation and Depreciation = Gross Investment − Net Investment. Therefore, option D is incorrect because depreciation must be deducted from gross investment to obtain net investment, not added. Adding it would overstate the actual increase in capital.

Correct answer: A. Net investment may fall

Explanation: Net investment is the difference between gross investment and depreciation. The effect depends on how much each changes, not on the gross-investment change alone. If depreciation increases by a larger amount than gross investment, the difference can decrease and may even become negative. Therefore, net investment may fall. It need not double or remain zero, and it is related to both variables.

Correct answer: B. Gross investment (320), depreciation (40)

Explanation: The increase in capital stock is the net investment, calculated as gross investment minus depreciation. The net amounts are A: 350 − 90 = 260, B: 320 − 40 = 280, C: 280 − 20 = 260, and D: 400 − 150 = 250. Hence B gives the largest increase, even though D has the highest gross investment.

Correct answer: B. Replacement part and net investment part

Explanation: The total expenditure first contains the replacement portion needed to compensate for the old machine’s depreciation. Since the new machine also has greater capacity, the additional expenditure creates new productive capital and is a net investment portion. Thus gross investment can contain both replacement and expansion components. It is not correctly classified as only consumption, tax, or wages.

Correct answer: A. 180 and 220

Explanation: First calculate depreciation from GDP − NDP, because NDP is GDP after depreciation: 1500 − 1320 = 180. Then calculate net investment as gross investment − depreciation: 400 − 180 = 220. The question asks for depreciation first and net investment second, so the correct pair is 180 and 220, given in option A.

Correct answer: B. 400

Explanation: The difference between a gross national product measure and its corresponding net measure is depreciation. Thus depreciation = GNP − NNP = 2,000 − 1,850 = 150. Since gross investment = net investment + depreciation, gross investment = 250 + 150 = 400. Option C is only depreciation, while A is only net investment.

Correct answer: A. 300 and 90

Explanation: Replacement investment compensates for depreciation, so depreciation is 90. Gross investment consists of replacement investment plus net investment. Therefore gross investment = 90 + 210 = 300, while depreciation = 90. Since the question asks for gross investment first and depreciation second, the correct pair is 300 and 90, shown in A.

Correct answer: B. 390

Explanation: Use net investment = gross investment − depreciation. Substituting the values gives −30 = 360 − depreciation. Rearranging, depreciation = 360 + 30 = 390. Depreciation exceeds gross investment by 30, which explains why net investment is negative. Option A comes from an incorrect subtraction, while C and D do not satisfy the identity.

Correct answer: A. Depreciation fully offset gross investment

Explanation: Net investment is calculated as gross investment minus depreciation: Net Investment = Gross Investment − Depreciation. If gross investment is positive but the capital stock does not rise, the net addition must be zero. This happens when depreciation is equal to gross investment, because all new investment only replaces worn-out capital. A positive net investment would increase the capital stock.

Correct answer: B. 120 lakh

Explanation: First calculate depreciation: 40% of 200 lakh = 0.40 × 200 = 80 lakh. Then apply Net Investment = Gross Investment − Depreciation. Thus, net investment = 200 − 80 = 120 lakh. The amount 80 lakh is depreciation, not net investment; 280 lakh incorrectly adds the two amounts, and 40 lakh does not follow from the calculation.

Correct answer: A. Gross investment when it is greater than depreciation

Explanation: Gross investment has two parts: replacement of capital lost through depreciation and net investment that adds to the capital stock. When gross investment exceeds depreciation, the first part covers the loss and the surplus becomes positive net investment. Depreciation alone is only the loss, zero net investment indicates replacement without expansion, and household consumption is not capital formation.

Correct answer: D. If gross investment is positive, net investment is always positive

Explanation: Net investment depends on the comparison between gross investment and depreciation, not on gross investment alone. A positive gross investment can still be less than depreciation, producing negative net investment; it can also equal depreciation, producing zero net investment. Options A, B, and C correctly apply this comparison, while option D wrongly says positive gross investment is always enough.

Correct answer: A. 100 / One hundred

Explanation: Apply the formula Net Investment = Gross Investment − Depreciation. The calculation is 140 − 40 = 100. Therefore the net portion of the gross investment is 100 units. The figure 40 represents depreciation, 180 would result from incorrectly adding the amounts, and zero would be possible only if depreciation equalled gross investment, which it does not here.

Correct answer: A. Replacement investment compensates for depreciation of worn-out or obsolete fixed capital

Explanation: Depreciation is the loss of value or productive service of fixed assets such as machines and buildings because of use, wear, or obsolescence. Replacement investment restores this lost capital. By itself, replacement merely maintains the capital stock; it increases net capital only when total gross investment exceeds depreciation. Thus A is correct, while B, C, and D confuse the concepts.

Correct answer: C. 455

Explanation: The change in capital stock is net investment. Since capital stock falls by 35, net investment is −35. Using Gross Investment = Net Investment + Depreciation, depreciation = 420 − (−35) = 455. Thus, option C is correct. A value of 385 would incorrectly subtract the fall as a positive amount, while 420 and 35 ignore one part of the relationship.

Correct answer: B. 800

Explanation: The difference between GDP and NDP is depreciation because NDP = GDP − Depreciation. Therefore, depreciation = 2500 − 2200 = 300. Gross investment equals net investment plus depreciation, so gross investment = 500 + 300 = 800. Option B is correct. The figures 500 and 300 are only the given net investment and calculated depreciation, not gross investment.

Correct answer: A. 250

Explanation: The difference between a gross and a net national product measure is depreciation: GNP − NNP = 3600 − 3150 = 450. Net investment is obtained by subtracting depreciation from gross investment. Hence, net investment = 700 − 450 = 250. Option A is correct. The value 450 is depreciation, while 700 is the given gross investment, so neither is the requested net investment.

Correct answer: B. 220

Explanation: Replacement investment compensates for depreciation, so it is treated as depreciation of 260. Gross investment = net investment + depreciation = −40 + 260 = 220. The negative net investment indicates that capital stock still fell overall, even though replacement investment occurred. Replacement investment alone is not gross investment here.