Question

The addition to capital stock in an economy is measured by net investment or new capital formation, which is expressed as:
1. Net investment = Gross investment + depreciation
2. Net investment = Gross investment - depreciation
3. Depreciation = Net investment + Gross investment
4. Gross investment ​= Net investment -depreciation

Answer 1

Correct Answer - Option 2 : Net investment = Gross investment - depreciation

The correct answer is Net investment = Gross investment - depreciation.

• The addition to the capital stock in an economy is measured by net investment or new capital formation, which is expressed as Net investment = Gross investment - depreciation.
• Gross Investment is referred to as the total expenditure that is made for buying capital goods over a time period, without accounting for depreciation.
  • In other words, gross investment is the amount that a company has invested in particular assets or the business as a whole without considering depreciation for the same.
• Net Investment, on other hand, is the actual addition that is made to the capital stock in a given period.
  • Net Investment takes into account the depreciation and is calculated by subtracting the depreciation from the gross investment.

• Estimates of National Income for 2020-21
  • Real GDP:
    • Real GDP at Constant (2011-12) Prices in the year 2020-21 is now estimated to be at Rs. 135 lakh crores in comparison to Rs. 145 lakh crores in 2019-20.
    • The GDP growth rate is -7.3% in the year 2020-21 in comparison to the 4% growth rate registered in the year 2019-20.
  • Nominal GDP:
    • GDP at Current Prices in the year 2020-21 is now estimated to be at Rs. 197 lakh crores in comparison to Rs. 203 lakh crores in 2019-20.
    • The GDP growth rate is -3% in the year 2020-21 in comparison to the 7.8% growth rate registered in the year 2019-20.
• The Gross Domestic Product (GDP) refers to the market value of all final goods and services produced within an economy.
  • It can be calculated into two ways:
    • Nominal GDP:
      • It refers to the GDP at the current market prices i.e., the GDP is calculated as per the market prices for the year for which the GDP is calculated.
    • Real GDP:
      • It refers to the GDP at base year prices i.e., the GDP is calculated as per the market prices in the base year. Thus, the Real GDP negates the inflation in goods and services.
    • In case of a high rate of inflation, the nominal GDP would be higher than the real GDP.
    • However, in the case of deflation, the real GDP would be higher than the nominal GDP.