Net investment refers
- A.Gross investment - Unexpected destruction of capital
- B.Gross investment - Loss of capital due to natural calamities
- C.Gross investment - Depreciation
- D.All of these
Show answer
Correct answer: C. Gross investment - Depreciation
Explanation
The correct answer is C, Gross investment - Depreciation. Net investment is gross investment minus depreciation, that is, the addition to the stock of capital left after making good the wear and tear of existing machines, buildings and equipment. Gross investment is the whole spending on capital goods in a year, while depreciation, also called consumption of fixed capital, is the fall in the value of capital through normal use and age. The same subtraction turns gross figures into net figures elsewhere in national accounts: gross domestic product minus depreciation gives net domestic product. If net investment is positive the economy's capital stock is growing, and if it is negative the stock is shrinking. A and B are wrong because sudden destruction of capital by accident or by a flood or earthquake is a capital loss and is not counted as depreciation. D is wrong because only one of the three statements is correct. Exam tip: net equals gross minus depreciation, the same rule for investment, GDP and national product.