Gross investment includes the total of all investments made in a country during one year. The country, however, does not benefit from the all of the money invested in machines and equipment because some machines age during the year. They do not work as well, and therefore contribute less to overall production.
Net investment equals gross investment, minus annual wear and tear. Another word for the wearing out of machines is depreciation. Net investment represents the actual amount of investments in the country taking into account depreciation of existing equipment.
- A net investment that is greater than 0 indicates an increase in capital goods in a country. These capital goods increase the country’s future production capacity, thereby shifting the Production Possibility Curve upwards, and increasing GDP. This is also called renewal of depreciation. Example: Assume that the monetary value of a country’s machinery totals $10 million at the beginning of the year, while depreciation during the year totals $2 million, and $5 million was invested during the year.
Gross investment equals $5 million.
Net investment equals $3 million ($5 million gross – $2 million depreciation).
- A net investment less than 0 means the amount of capital goods in the country has decreased. As a result, future production capacity and GDP also decline, and the PPC curve shifts downward. This is called a capital-consuming economy. This is also called renewal of depreciation
- When net investment is equal to 0, the amount of capital goods in the country does not change. The country’s future production capacity and GDP remain the same and the PPC curve does not shift in either direction.