Gross investment and depreciation

Correct answer: A. Because it adds extra productive capacity

Explanation: Replacement investment restores the productive capacity lost through depreciation; it mainly keeps the existing capital stock functioning. A major improvement that raises a machine’s capacity creates additional productive potential beyond simple restoration. It can therefore contribute to net investment, provided its addition exceeds the capital value consumed. Thus A is the relevant distinction.

Correct answer: A. Net investment

Explanation: Gross investment and depreciation are measured over a period, so both are flow variables. Their difference is net investment: net investment = gross investment − depreciation. This shows the change in capital stock during that period. GDP measures total domestic output, while national and personal income are different aggregates, so none of those is the requested difference.

Correct answer: A. On the difference between gross investment and depreciation

Explanation: New capital formation is represented by gross investment, but part of it may only replace capital that has worn out. The final effect on capital stock is determined by net investment, calculated as gross investment minus depreciation. If the difference is positive, capital expands; if zero, it is maintained; and if negative, it declines. Therefore A is correct.

Correct answer: A. Capital expansion may fall

Explanation: Net investment is calculated as gross investment minus depreciation. If gross investment stays unchanged while depreciation rises, the difference between new investment and worn-out capital becomes smaller. Therefore, the addition to the capital stock and the scope for capital expansion may decline. The result is not necessarily a fall in gross investment itself.

Correct answer: B. Depreciation is greater than gross investment

Explanation: Purchasing new machines contributes to gross investment, but capital stock changes according to net investment. If the stock is falling, net investment is negative. From net investment = gross investment − depreciation, a negative result means depreciation is greater than gross investment. Continued purchases therefore do not guarantee capital expansion.

Correct answer: A. Net investment may fall

Explanation: Net investment equals gross investment minus depreciation. The relevant comparison is not whether gross investment rises by itself, but whether it rises more or less than depreciation. If depreciation increases by a larger amount than gross investment, the difference between them becomes smaller, so net investment may fall. It could even become negative if depreciation exceeds gross investment. Therefore, option A is correct; the other statements ignore this subtraction.

Correct answer: B. Depreciation is deducted

Explanation: Gross measures include the value associated with the depreciation or consumption of fixed capital during production. Net measures aim to show the amount remaining after allowing for that loss of capital. Therefore depreciation, also called consumption of fixed capital in national accounting, is deducted when converting a gross measure into a net measure.

Correct answer: A. It can increase productive capacity

Explanation: Positive net investment means that gross investment is greater than depreciation, so the capital stock increases after worn-out capital has been replaced. A larger stock of usable machines, buildings, or equipment can allow the economy to produce more, although the actual effect also depends on efficiency and utilization. Positive net investment does not eliminate depreciation.

Correct answer: A. Real capital expansion may be overstated

Explanation: Gross investment counts all investment spending, including spending that merely replaces capital lost through depreciation. Real capital expansion is measured by net investment, which subtracts depreciation from gross investment. If depreciation is ignored, replacement spending may be mistaken for new capital addition, causing the amount of actual expansion to be overstated. The accounting values themselves do not become zero or negative.

Correct answer: B. Depreciation

Explanation: Depreciation includes the loss in the value or productive usefulness of fixed capital over time. A machine may become obsolete when newer technology makes it less useful, even if it has not physically worn out. This is called obsolescence and is a form or cause of economic depreciation. Gross investment is spending on capital, not the loss of its value.

Correct answer: A. Gross investment is greater than depreciation

Explanation: The replacement part of gross investment first covers depreciation. If there is also an additional amount that creates new capital, total gross investment must exceed depreciation. The excess is net investment and represents capital expansion. Equality would mean that all investment only replaces worn-out capital, while a smaller amount would not even complete replacement.

Correct answer: A. Depreciation fully offset gross investment

Explanation: The relationship is net investment = gross investment − depreciation. If gross investment is positive but the capital stock does not rise, net investment is zero, assuming no other adjustment. This occurs when depreciation exactly equals gross investment. Option B would make net investment positive, while C and D contradict the definitions.

Correct answer: A. A flow reducing capital stock

Explanation: A capital stock is measured at a point in time, whereas depreciation is recorded over a period as the amount of fixed capital used up through wear, age, or obsolescence. It is therefore a flow that reduces the productive capital stock. Investment may offset this reduction, but depreciation itself does not increase capital.

Correct answer: B. Net investment

Explanation: Gross investment includes spending that merely replaces capital lost through depreciation. Net investment removes this replacement requirement by subtracting depreciation from gross investment. Its positive amount is therefore the actual net addition to the capital stock. Depreciation reduces capital, while consumption and transfer income are not measures of capital accumulation.

Correct answer: A. Gross investment is less than depreciation

Explanation: Capital stock changes according to net investment: gross investment minus depreciation. If depreciation exceeds the gross investment being made, the difference is negative, so the capital stock falls despite positive investment spending. If gross investment exceeded depreciation, net investment would be positive and capital would rise; zero depreciation would not explain the decline.

Correct answer: B. Capital stock will decrease

Explanation: Net investment equals gross investment minus depreciation. When depreciation is continuously larger, this difference remains negative, meaning that capital is being used up faster than it is replaced. Over time, repeated negative net investment reduces the capital stock. It does not imply that the stock instantly becomes zero, so option C is too absolute.

Correct answer: A. Gross investment exceeds depreciation and depreciation is positive

Explanation: Positive depreciation means that some capital has been consumed and part of gross investment must replace it. If gross investment is greater than depreciation, the remaining amount is positive net investment, which raises the capital stock. Equality would only maintain the stock, while a smaller gross investment would reduce it rather than increase it.

Correct answer: C. ₹340

Explanation: Net investment measures the addition to the capital stock after allowing for the capital that has worn out or depreciated. The formula is Net Investment = Gross Investment − Depreciation. Therefore, ₹400 − ₹60 = ₹340. Gross investment is ₹400, but ₹60 merely replaces depreciated capital, leaving a net addition of ₹340.

Correct answer: A. ₹975 crore

Explanation: Net capital formation measures the addition to the capital stock after allowing for the capital consumed through wear and tear, obsolescence, or normal use. The relationship is Net capital formation = Gross capital formation − Consumption of fixed capital. Therefore, ₹1,250 crore − ₹275 crore = ₹975 crore. The depreciation amount is deducted rather than added because it represents the portion of gross investment needed merely to replace used-up capital.

Correct answer: A. GCF will increase through an increase in inventories — स्टॉक में वृद्धि के कारण GCF बढ़ेगा

Explanation: Finished goods produced during the current period but not sold are recorded as an increase in inventories, also called change in stock. In the expenditure method, this inventory accumulation is treated as a form of investment and forms part of gross capital formation. Thus, unsold output is included rather than omitted.

Correct answer: A. Compensation for depreciation

Explanation: Replacement investment is the part of gross investment used to replace capital goods that have worn out or become obsolete. It compensates for depreciation and maintains the existing productive capacity of the economy. Since NNP is obtained after deducting depreciation from GNP, replacement investment is directly connected with this adjustment.

Correct answer: A. Investment made to replace worn-out capital

Explanation: Replacement investment is expenditure on restoring or replacing capital goods that have worn out or become obsolete during production. It compensates for depreciation and is part of gross investment. Since NNP is a net measure, depreciation is deducted from GNP: NNP = GNP − depreciation. Replacement investment itself is not consumption, foreign-income payment, or a government transfer.

Correct answer: A. When depreciation is very high

Explanation: At the same valuation basis, GNP is a gross measure and NNP is a net measure. The relationship is GNPMP = NNPMP + depreciation, so GNPMP − NNPMP = depreciation. Consequently, a larger depreciation allowance creates a larger difference between the two aggregates. NIT, NFIA, and the equality of exports and imports do not determine this specific gross-versus-net gap.

Correct answer: A. Net investment

Explanation: Net investment is calculated as gross investment minus depreciation: Net investment = Gross investment − Depreciation. Gross investment includes spending that replaces worn-out capital as well as additions to the capital stock. After depreciation is deducted, only the net addition to productive capital remains, so option A is correct.

Correct answer: A. Net investment may be negative and capacity may fall

Explanation: Net investment = gross investment − depreciation. When depreciation is greater than gross investment, this difference is negative. It means replacement spending is insufficient to maintain the existing capital stock, so productive capacity may decline over time. This conclusion concerns capital formation, not NIT or NFIA.