What is the gross and net investment?
I will be discussing some specific terms under investments from the national income accounting point of view. I know there are several types of investments, feel free to leave your valuable comments. But my focuses only on those terms used under the national income concept. Let’s start first with the meaning of gross and net investment.
What do we mean by investment?
What do we mean by Gross investment?
Investment means addition made to the existing stock of capital during the year, whereas, Gross investment means total addition made to the physical stock of capital during a period. The gross investment includes depreciation and it is also known as Gross capital formation (in short gross means total).
What are net investment?
Net investments are the net addition to the real stock of capital during a period of time.
What is the difference between gross and net investment?
The gross investment includes depreciation (I will be explaining depreciation in a while). But net investment does not include depreciation. That’s the most important difference between these terms.
What is depreciation?
Depreciation means, fall in the value of fixed capital goods due to normal wear and tear (i.e., with the use of machinery, it start to lose value over some time), expected or foreseen obsolescence (i.e., it means you are aware that the value of capital will fall with its usage) and with the passage of time. For example, when we buy a car, we know its value will fall over time, it will no be resold at the same price we purchased it for.
Alternative terms used for Depreciation include consumption of fixed capital, current replacement cost, replacement of fixed capital and, capital consumption. So, whenever you see these terms, it means depreciation only. Remember these, as they are commonly used to solve numerical problems under national income.
What is capital loss?
A capital loss is a loss of value of fixed assets but these are not in use. It happens because of natural calamities and falls in the market value of assets at times of economic recession. So, capital loss includes unexpected or unforeseen obsolescence of capital. For example, the car we bought met with an accident (don’t worry everyone inside the car is safe), and its bumper got damaged, so this is unexpected or unforeseen obsolescence of capital.
Thank You for reading.