Which of the following is taken into account in depreciation ?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Wear and tear of capital good
Depreciation is the fall in the value of capital goods as they are used in production. It is an allowance for their expected wear and tear over their life.
Depreciation does not take into account unexpected or sudden destruction or disuse of capital, such as losses from accidents or natural calamities. These are chance events outside normal use.
NCERT (2026-27): “2.1 Some Basic Concepts of Macroeconomics … A significant part of current output of capital goods goes in maintaining or replacing part of the existing stock of capital goods. This is because the already existing capital stock suffers wear and tear and needs maintenance and replacement. 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.… Introductory Macroeconomics – Chapter 2, footnote 2: 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.” |