Question

Part 2

Use the concepts of gross investment and net investment to explain the differences between an economy that has a rising stock of capital and one that has a falling stock of capital.

Explain how it is impossible for gross investment to be less than zero, even though net investment can be positive, negative, or zero. What real world examples can you provide?

Answer 1

SOLUTION

When gross investment exceeds depreciation, net investmentis positiveand production capacity expands; the economy ends the year with more physical capital than itstarted with. When gross investment equals depreciation,netinvestment is zeroand productioncapacity is said to be static; the economy endsthe year with the same amountof physical capital.When depreciation exceedsgross investment, netinvestment is negativeand production capacitydeclines; the economy ends the yearwith lessphysical capital