Question

Use the following information to work.The Bureau of Economic Analysis reported that the U.S. capital stock was \(\$ 46.3\) trillion at the end of \(2010, \$ 46.6\) trillion at the end of \(2011,\) and \(\$ 47.0\) trillion at the end of \(2012 .\) Depreciation in 2011 was \(\$ 2.4\) trillion, and gross investment during 2012 was \(\$ 2.8\) trillion (all in 2009 dollars). Calculate U.S. net investment and gross investment during 2011.

Short answer

Gross Investment (2011) = \( 0.3 \) trillion; Net Investment (2011) = \( -2.1 \) trillion.

Step-by-step solution

- Determine Gross Investment for 2011

To find the gross investment for 2011, calculate the difference between capital stock at the end of 2011 and the end of 2010. Formula: Gross Investment (2011) = Capital Stock (End 2011) - Capital Stock (End 2010)Gross Investment (2011) = \( 46.6 \) trillion - \( 46.3 \) trillion = \( 0.3 \) trillion

- Calculate Net Investment for 2011

Depreciation for 2011 is given as \( 2.4 \) trillion. Formula: Net Investment (2011) = Gross Investment (2011) - Depreciation (2011) Net Investment (2011) = \( 0.3 \) trillion - \( 2.4 \) trillion = \( -2.1 \) trillion

Key concepts

gross investment

Gross investment represents the total amount of investment spent on new capital assets before accounting for depreciation. This value helps us understand the scale of new investments being made without considering wear and tear or aging of existing assets.

Let's illustrate this with an example. Suppose you are checking the gross investment for 2011 based on the provided data. The formula to calculate gross investment is:
Gross Investment (2011) = Capital Stock (End 2011) - Capital Stock (End 2010)
This is simply the difference between the capital stock values at the end of the years.

From the information given:
Capital Stock (End 2011) = \( \$46.6\trillion \)
Capital Stock (End 2010) = \( \$46.3\trillion \)
Therefore, Gross Investment (2011) = \( \$46.6 \) trillion - \( \$46.3 \) trillion = \( \$0.3 \) trillion.

This means that the gross investment for the year 2011 was \$0.3\ trillion, without accounting for any depreciation.

net investment

Net investment takes into account the depreciation of capital assets. It represents the actual amount of investment that contributes to the growth of the capital stock after accounting for depreciation.

The formula to determine net investment is:
Net Investment = Gross Investment - Depreciation
This formula acknowledges that some of the gross investments are necessary just to replace old or worn-out equipment rather than contributing to growth.

Let's calculate net investment for 2011 using the provided data:
Gross Investment (2011) = \( \$0.3\trillion \)
Depreciation (2011) = \( \$2.4\trillion \)
Net Investment (2011) = \( \$0.3 \) trillion - \( \$2.4 \) trillion = \( \$-2.1\trillion \)

This negative figure of \$-2.1\trillion suggests that after accounting for depreciation, the net result for 2011 points to a reduction in the overall capital stock. Essentially, the investments made were not sufficient to keep up with the capital depreciation.

depreciation

Depreciation refers to the reduction in value of capital assets over time due to factors such as wear and tear, aging, or obsolescence. This concept is crucial as it impacts both the calculation of net investment and the assessment of true economic growth.

In 2011, the reported depreciation was \( \$2.4\trillion \). This value shows how much of the capital stock's value was lost over the year.

Given the capital stock at the beginning and end of the year, depreciation helps to determine whether the net investment indicates growth or decline. By deducting depreciation from gross investment, we measure the true increase or decrease in productive assets.

Here’s a quick illustration:

• If gross investment is high but depreciation exceeds it, net investment will be negative, signaling reduction in capital stock.
• If gross investment is higher than depreciation, net investment is positive, indicating growth.
• Understanding both gross investment and depreciation helps provide a complete picture of economic health.

Depreciation is an essential factor in macroeconomic analysis as it offers insights into the sustainability and efficiency of ongoing investments.