The basic difference between gross investment and net investment is the consideration of depreciation. In gross investment, the expenditure calculated doesn’t consider depreciation. On the other hand, in net investment, there is a consideration of depreciation while calculating the expenditure.
To know the difference between these two, we must clear the meaning of these terms:
Meaning 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.
Meaning 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 worn-out assets. Thus, it helps in maintaining the existing the capital stock.
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Chart of Difference between Gross Investment and Net Investment:
| Basis of Difference | Gross Investment | Net Investment |
| Meaning |
It refers to the expenditure by producers on the purchase of new assets as well as the replacement of existing assets during a year. |
It refers to the expenditure by producers on the purchase of new assets only. |
| Depreciation | It doesn’t consider depreciation separately for finding total expenditure. | It considers depreciation while calculating the final value. |
|
Calculation |
Here, it is calculated by adding up all the expenditure incurred on all capital goods. | In this investment, the total amount is calculated by subtracting depreciation from gross investment. |
|
Formula |
Gross Investment = Expenditure during the year on (Fixed assets + Inventory stock) | Net investment = Gross investment – Depreciation (expenditure on replacement of worn-out fixed assets) |
|
Includes |
It includes all the purchases of fixed assets and inventory stock during a period. | It includes only a change in the existing stock during a period. |
|
Indicator |
It is not considered the best indicator of GDP growth. | It is considered the best indicator of GDP growth. |
|
Significance |
It helps in determining the total expenditure incurred on all capital goods. | It helps in enhancing the production capacity, labor efficiency, and growth of the economy. |
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Conclusion:
Thus, these investments are essential in any economy. As here, One defines the total expenditure on assets in the business. Whereas, other represents investment only in new assets.
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