Gross investment includes the sum of all investments made in a country during one year. The country however does not benefit from all the money invested in machines and equipment because some machines get older during the year. They do not work too, and therefore contribute less to full production.
Equal investment net gross investment, negative annual use and breaks. Another word for the wearing down of machines is depreciation. The net investment represents the real amount of investments in the country that taking into account the depreciation of the existing equipment.
- A net investment that is more than 0 indicates a salary increase in capital goods in a country. These capital goods increase the future capacity of the country’s production, thereby changing the Production Possibility Curve upward, and increasing GDP. This is also called the renewal of depreciation. Example: Assume that the monetary value of a country’s machinery totals $ 10 million at the beginning of the year, while the depreciation during the year totals $ 2 million, and $ 5 million was invested during the year.
The gross investment equals $ 5 million.
The 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, the future capacity of production and GDP also decrease, and the CPP curve changes downward. This is called a capital-consuming economy. This is also called the renewal of depreciation
- When the net investment equals 0, the amount of capital goods in the country does not change. The future capacity of the country’s production and GDP remain the same and the CPP curve does not change in any direction.