Gross investment refers to a flow of expenditure over a given period of time on new fixed capital (e.g., houses, factories, machinery etc.) or on addition to stocks (e.g., raw materials, intermediate goods, unsold finished goods, etc.). If K₀stands for capital stock at the beginning of the period, Kt for capital stock at the end of the period t, and ΔK for the change in capital stock over period t, then, It, the investment may be defined as follows:

It = ΔKt = (Kt – K₀)

This is called gross investment.

Net investment. A part of the expenditure may be incurred for the purchase of such machinery, equipment, or materials which ar required essentially to maintain the stock of economy’s capital intact. This type of expenditure is referred to as replacement investment or capital consumption. This may be deducted from gross investment to obtain net investment. Net investment, therefore, refers to that amount of expenditure which is obtained after deducting the replacement investment or capital consumption from the gross investment.

Gross investment = Net investment + Capital consumption or
                                                             replacement investment

Or Net Investment = Gross investment – Capital consumption or
                                                                  replacement investment

If gross investment is only sufficient to maintain capital stock intake, net investment will be zero. If gross investment is not even sufficient to cover capital consumption, net investment will be negative; that is, the actual stock of capita is declining. If gross investment exceeds the replacement investment, net investment will be positive.

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