Question

9. Use the concepts of gross investment and net investment to distinguish between an economy that has a rising stock of capital and one that has a falling stock of capital. Explain. “Though net investment can be positive, negative, or zero, it is impossible for gross investment to be less than zero.”

Answer 1

Let us see the definitions of net and gross investment . Gross investment is the total value of all newly produced capital goods , such as machinery , housing , plants , equipments etc , in a given time period .

Net investment = Gross investment - depreciation .

Depreciation is the amount by which an asset's value decrease in a given period .

So , Capital ( at the end of period ) = Capital (beginning of period ) + net investment

An economy that has rising stock of capital has higher net investment than an economy which has falling stock of capital . We cannot distinguish this based on gross investment since gross investment does not take into account depreciation .

So with rising stock of capital : net investment is positive . Falling stock of capital : net investment is negative .

When gross investment is higher than depreciation net investment is positive and production capacity expands; the economy ends the year with more physical capital than it started with . The opposite is the case when gross investment is lower than depreciation , net investment is negative . When gross investment is equal to depreciation , net investment is zero .

But in case of gross investment it can never be negative since it is value of newly produced capital which does not include depreciation . It can either be positive or zero .