Gross Investment and Net Investment
Investment is closely related to Economic growth. One of the important reasons for making investments is Capital Consumption, which is another technical term used for depreciation. By capital consumption, we mean to replace worn out, or failing machinery, equipment or buildings. Capital consumption arises from the continuous depreciation of fixed capital assets. The other obvious reason is to undertake purchase of a new machinery, equipment, railroad, buildings and factories to increase the productive capacity. The long term objective of such investments is to increase competitiveness, reduce long term costs and raise profits.
The investment made for both new acquires and Capital Consumption is called Gross Investment. However, net investment only measures new assets rather than replacement assets. This relationship is expressed as follows:
Net investment = gross investment – depreciation
We take an example here. We suppose that a shipping company replaces five worn out ships with identical new ships. At the same time, it also purchases two new ships for increasing the traffic capacity. In this case, the gross investment is seven ships but net investment is only two ships. Here, the net investment is what attracts the economists as a basis for economic growth.