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Gross Net Investment

Gross investment refers to a flow of expenditure over a given period of time on new fixed capital (e.g., house, factories, machinery etc.) or on addition to stock (e.g., raw materials, intermediate goods, unsold finished goods, etc.). If K₀ stands for capital stock at the beginning of the period, K_t for capital stock at the end of the period t, and ∆k for the change in capital stock over period t, then, it, the investment may be defined as follows:

I_t = ∆k_t = (k_t – k₀)

This is called gross investment.

Net investment: A part of the expenditure may be incurred for the purchases of such machinery, equipment, or materials which are required essentially to maintain the stock of economy’s capital consumption. This may be deduced 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 + consumption or replacement investment

or, Net investment = Gross investment – Capital consumption or replacement investment

If gross investment is only sufficient to maintain capital stock intact, 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 capital is declining. If gross investment exceeds the replacement investment, net investment will be positive.