Concept of Gross and Net Investment

The concept of gross and net investment refers to the change in the stock of capital during a specific period of time. Here, change in the capital stock includes the change in fixed as well as inventory investment.

Concept of Gross Investment:

It refers to the expenditure on the purchase of fixed assets and inventory during a financial year. In other words, gross investment is the sum total of expenditure incurred on fixed assets and inventory during a year. Hence,

Gross Investment = Expenditure during the year on (Fixed assets + Inventory stock)

Here, the inventory stock also includes the unsold inventory stock. This is because the unsold stock of goods with producers is treated as their purchases of stock during the year.

Furthermore, in the expenditure of fixed assets, the purchases of new assets, as well as the replacement expenditure for existing ones, are included. As we know, the fixed assets are used for several years. And, they have some life for their use. Also, these become obsolete or worn out after a specific time period. Consequently, these require some replacement. Hence, the replacement of fixed assets, owing to their depreciation is a part of gross investment. But, it doesn’t increase the existing stock of capital. Thus, it only maintains the existing stock of capital. 

Concept of Net investment:

The concept of Net investment refers to the purchases of new assets only during the year. In other words, net investment indicates the increase in the stock of capital during a financial year.

Calculation  of net investment:

If we deduct the depreciation or expenditure on the replacement of fixed assets from the gross investment, we get the net investment. Thus,

Net investment = Gross investment – Depreciation (expenditure on replacement of worn-out fixed assets)

Therefore, net investment leads to the stock of capital. Depreciation as a part of gross investment replaces the worn-out assets. Thus, it helps in maintaining the existing capital stock.

Significance of Net investment:

  1. It results in more labor efficiency. It is because the availability of capital per unit of labor increases with an increase in capital stock.
  2. In-country like India, where there is unemployment due to lack of capital. It helps in raising more employment opportunities.
  3. Net investment is a net rise in the production capacity of the economy. Accordingly, GDP growth gets accelerated.

In short, we can say net investment enhances production capacity, generates more employment opportunities, promotes labor efficiency, and accelerates GDP growth. Therefore, it is considered an important element for attracting foreign direct investment. 

The concept of gross and net investment can be distinguished on the basis of depreciation. Because, the gross investment includes the depreciation of fixed assets but, the net investment doesn’t. 

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References:

Introductory Microeconomics – Class 11 – CBSE (2020-21)

 

 

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