Which of the following statements are correct?
(A) For economists, investment is always capital formation.
(B) Buying an insurance policy is investment in the economist's sense.
(C) Net investment = Gross investment − Depreciation.
(D) Depreciation includes the sudden destruction of capital by a natural calamity.
(E) Depreciation is accounted for every year even if no real expenditure is incurred in that year.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → (A), (C) and (E) only
For economists, investment means adding to the capital stock. Depreciation is the expected yearly wear and tear.
(A) For economists, investment is always capital formation. — True. Investment is always capital formation.
(B) Buying an insurance policy is investment in the economist's sense. — False. An insurance policy has nothing to do with investment in the economist’s sense.
(C) Net investment = Gross investment − Depreciation. — True. Net investment = gross investment − depreciation.
(D) Depreciation includes the sudden destruction of capital by a natural calamity. — False. Depreciation does not cover sudden destruction by natural calamities.
(E) Depreciation is accounted for every year even if no real expenditure is incurred in that year. — True. It is an accounting concept, recorded every year.
NCERT (2026-27): “2.1 Some Basic Concepts of Macroeconomics … This is how economists define investment. This must not be confused with the commonplace notion of investment which implies using money to buy physical or financial assets. Thus use of the term investment to denote purchase of shares or property or even having an insurance policy has nothing to do with how economists define investment. Investment for us is always capital formation, a gross or net addition to capital stock.” “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 “2.1 Some Basic Concepts of Macroeconomics … Depreciation is thus an annual allowance for wear and tear of a 1This is how economists define investment. This must not be confused with the commonplace notion of investment which implies using money to buy physical or financial assets. Thus use of the term investment to denote purchase of shares or property or even having an insurance policy has nothing to do with how economists define investment. Investment for us is always capital formation, a gross or net addition to capital stock. capital good. In other words it is the cost of the good divided by number of years of its useful life. Notice here that depreciation is an accounting concept. No real expenditure may have actually been incurred each year yet depreciation is annually accounted for. …” “2.1 Some Basic Concepts of Macroeconomics … Depreciation does not take into account unexpected or sudden destruction or disuse of capital as can happen with accidents, natural calamities or other such extraneous circumstances.” |