The primary distinction between gross and net investment is the accounting for depreciation. The expenditure calculated in gross investment does not account for depreciation. In net investment, however, depreciation is taken into account when calculating expenditure.
Gross investment is defined as the total expenditure for purchasing capital goods over a given time period, excluding depreciation. In other words, gross investment is the amount of money that a company has invested in specific assets or the business as a whole before depreciation. Net Investment, on the other hand, is the actual addition to capital stock in a given period. Net Investment takes into account the depreciation and is calculated by subtracting the depreciation from the gross investment.
Gross Investment
- Gross Investment is the total expenditure made over a time period for purchasing capital goods or adding to the capital stock, excluding depreciation. It refers to the expenditure on fixed assets and inventory purchases during a fiscal year. In other words, gross investment is the total of all fixed asset and inventory expenditures over the course of a year.
- Gross investment is calculated by totaling the costs of acquiring capital goods. The unsold inventory stock is included in the inventory stock in this case. This is due to the fact that producers’ unsold stock is treated as stock purchased during the year.
- Does not take depreciation into account when calculating final value. The fixed assets are used for a long time. They also have some life left in them. Furthermore, these become obsolete or worn out after a certain period of time. As a result, they need to be replaced.
- It shows how much money is spent entirely on capital goods. The replacement of fixed assets due to depreciation is a component of gross investment. However, it does not increase the existing capital stock. As a result, it only maintains the existing capital stock.
Net Investment
- Net investment is the actual expenditure for adding to the capital stock or purchasing capital goods over a time period that takes depreciation into account. Net investment refers to the acquisition of new assets only during the fiscal year. In other words, net investment represents the increase in capital stock over the course of a fiscal year.
- Net investment is calculated by subtracting depreciation from gross investment. The net investment is obtained by subtracting the depreciation or expenditure on the replacement of fixed assets from the gross investment.
- Considers depreciation for determining final value. It includes only a change in the existing stock during a period.
- It gives an idea about how much money is actually spent on capital goods by taking into account factors like wear and tear. It therefore helps in improving the efficiency of the organization. It is considered the best indicator of GDP growth.
