During a year, a firm buys a new machine worth Rs 50 lakh and uses up raw materials worth Rs 20 lakh in production. Its stock of finished goods rises from Rs 10 lakh to Rs 15 lakh over the year. What is the firm’s investment for the year, as investment is defined in NCERT?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Rs 55 lakh
Investment is the addition to physical capital (the machine) plus the change in the stock of finished goods. Raw materials used up are intermediate goods, not investment.
\( \text{Investment} = 50 + (15 - 10) = 55 \)
Option (1) Rs 55 lakh — Correct. Rs 50 lakh machine plus Rs 5 lakh rise in stock.
Option (2) Rs 75 lakh — Incorrect. This adds the raw materials used up, which are intermediate goods.
Option (3) Rs 65 lakh — Incorrect. This adds the closing stock of Rs 15 lakh; only the change in stock, Rs 5 lakh, counts.
Option (4) Rs 50 lakh — Incorrect. This leaves out the rise in inventory.
NCERT (2026-27): “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. Note that ‘investment goods’ (such as machines) are also part of the final goods – they are not intermediate goods like raw materials. Machines produced in an economy in a given year are not ‘used up’ to produce other goods but yield their services over a number of years. Investment decisions by producers, such as whether to buy a new machine, depend, to a large extent, on the market rate of interest. However, for simplicity, we assume here that firms plan to invest the same amount every year. …” |