EconomicsMacro Economics: National Income Accounting

Investment is defined as the addition to the stock of physical capita…

Investment is defined as the addition to the stock of physical capital, such as machines and buildings, and changes in inventories. Purchase of new machinery and equipment by firms falls under which category of investment in national income accounting?

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → Fixed business investment

Investment adds to the stock of physical capital. Addition to the machinery, factory buildings and equipment of firms is fixed business investment.

Option (1) Inventory investment — Incorrect. Inventory investment is the change in the stock of finished goods, semi-finished goods and raw materials.

Option (2) Residential investment — Incorrect. Residential investment is the addition of housing.

Option (3) Fixed business investment — Correct. New machinery and equipment of firms is fixed business investment.

Option (4) Replacement investment — Incorrect. Replacing worn-out capital is part of gross investment and is matched by depreciation. It is not one of the three categories: inventory, fixed business and residential investment.

This question uses National Income Accounting and Determination of Income and Employment together.

NCERT (2026-27): “2.2.1 The Product or Value Added Method … There can be three major categories of investment. First is the rise in the value of inventories of a firm over a year which is treated as investment expenditure undertaken by the firm. The second category of investment is the fixed business investment, which is defined as the addition to the machinery, factory buildings and equipment employed by the firms. The last category of investment is the residential investment, which refers to the addition of housing facilities. …”

“Chapter 4: Determination of Income and Employment – 4.1.2 Investment: Investment is defined as addition to the stock of physical capital (such as machines, buildings, roads etc., i.e. anything that adds to the future productive capacity of the economy) and changes in the inventory (or the stock of finished goods) of a producer. …”