At the start of a year, the capital stock of an economy is worth Rs 2,000 crore. At the end of the year, it is worth Rs 1,980 crore. Gross investment during the year is Rs 80 crore. What are the depreciation and the net investment for the year?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Rs 100 crore and minus Rs 20 crore
Given:
Capital stock: Rs 2,000 crore → Rs 1,980 crore
Gross investment = Rs 80 crore
Net investment is the new addition to the capital stock: the change in capital stock over the year. It equals gross investment minus depreciation.
\( \displaystyle \text{Net investment} = 1{,}980 - 2{,}000 = -20 \)
\( \displaystyle \text{Depreciation} = 80 - (-20) = 100 \)
Depreciation is Rs 100 crore and net investment is minus Rs 20 crore. The capital stock shrank because wear and tear (100) was more than the new capital goods added (80).
Gross and net investment are different: gross investment is all capital goods produced; net investment is what is left after replacing worn-out capital, so it can be negative.
NCERT (2026-27): “2.1 Some Basic Concepts of Macroeconomics … A part of the capital goods produced this year goes for replacement of existing capital goods and is not an addition to the stock of capital goods already existing and its value needs to be subtracted from gross investment for arriving at the measure for net investment. 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” “Net Investment = Gross investment – Depreciation …” |