Use the concepts of gross investment and net investment to distinguish between a
ID: 1102109 • Letter: U
Question
Use the concepts of gross investment and net investment to distinguish between an economy that has a rising stock of capital and one that has a falling stock of capital. In 1933 net private domestic investment was minus $6 billion. This means that in that particular year the economy produced no capital goods at all.
This statement is
a.)incorrect because negative net investment does not mean the economy produced no new capital goods in that year.
b.)correct because gross investment exceeded depreciation.
c.)incorrect because gross investment exceeded depreciation.
d.)correct because negative net investment means the economy produced no new capital goods in that year.
Explanation / Answer
Though net investment can be positive, negative, or zero, it is quite impossible for gross investment to be less than zero.
When gross investment exceeds depreciation, net investment is positive and production capacity expands; the economy ends the year with more physical capital than it started with. When gross investment equals depreciation, net investment is zero and production capacity is said to be static; the economy ends the year with the same amount of physical capital. When depreciation exceeds gross investment, net investment is negative and production capacity declines; the economy ends the year with less physical capital.
The first statement AND third statements are right. Just because the net investment was a minus $6 billion in 1993 does not mean the economy produced no new capital goods in that year. It simply means depreciation exceeded gross investment by $6 billion. So the economy ended the year with $6 billion less capital.
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