GROSS  AND NET INVESTMENT

The gross investment refers to a flow of expenditure on new fixed capital assets (e.g., houses, machinery, factories, etc.) or change in inventories (e.g., raw materials, unsold consumer goods) over a given time period. The gross investment can symbolically be written as
                               

Here, ΔK_t is the change in the capital stock over a given time period ‘t’,   K_t  stands  for  the capital stock at the end of the period ‘t’ and K0 for the capital stock at the beginning of the period. It may be called as the gross investment at the end of the period ‘t’.

The gross investment made in the economy may not be the net addition to the capita stock, since a part of the new capital will be needed to replace the depreciated capital stock. The expenditure incurred for the replacement of the capital depreciated during the year is called the replacement investment. This is necessary to maintain the existing total of structures and producers’ durable equipment used up in producing the period’s output is deducted from the gross investment to get the net investment. In brief,

Net Investment = Gross Investment – Replacement Investment

                   
  or                          Gross Investment = Net Investment + Replacement Investment


When the gross investment is just sufficient to maintain the capital stock intact, the net investment will be zero. Here, the gross investment equals the amount of the capital used up during the period. However, when the economy is in a grip of recession, the prospects of new investment are very pessimistic. In this depressed atmosphere, the stocks of unsold goods pile up and the investors become reluctant to incur expenditure even for replacing the depreciated capital equipment. When the gross investment is less than the replacement requirements, the difference is the negative net investment, or disinvestment. It represents a decrease is the stock of the capital. The net investment will be possible only, when the gross investment exceeds the replacement investment. The lack of net investment is not only a serious obstacle to development, it may also put the economy into the trap of depression causing tremendous strain for the people.

For more help in Gross and Net Investment please click the button below to submit your homework assignment