During a year, firms in an economy add machines worth Rs 500 crore, new houses worth Rs 120 crore are built, and inventories of firms rise by Rs 80 crore. Depreciation is Rs 150 crore. What is the net investment of the economy?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Rs 550 crore
Given:
Machines added = Rs 500 crore
New houses = Rs 120 crore
Rise in inventories = Rs 80 crore
Depreciation = Rs 150 crore
Gross investment has three parts: fixed business (machines), residential (houses) and inventory investment. Net investment takes out depreciation.
Gross investment = 500 + 120 + 80 = 700
Net investment = 700 − 150 = Rs 550 crore
Option (2) Rs 700 crore — this is gross investment.
Option (4) Rs 470 crore — leaves out the rise in inventories.
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. …” “2.1 Some Basic Concepts of Macroeconomics … This deletion, which is made from the value of gross investment in order to accommodate regular wear and tear of capital, is called depreciation. So new addition to capital stock in an economy is measured by net investment or new capital formation, which is expressed as |