Question

Use the concepts of gross investment and net investment to distinguish between an economy that has a rising capital stock and one that has a falling capital stock. Explain: “Though net investment can be positive, negative, or zero, it is impossible for gross investment to be less than zero.”

Short answer

When gross investment is higher than depreciation, the net investment will be positive, and the country’s capital stock will be rising. When gross investment is lower than depreciation, the net investment will be negative, and the country’s capital stock will be declining.

Gross investment cannot be less than zero as the minimum investment possible is zero.

Step-by-step solution

Relation between net investment, gross investment, and capital stock

When the gross investment is more than the depreciation, the net investment will be positive, and the total productivity will also increase.Likewise, when the gross investment is the same as depreciation, the net investment will be equal to zero, and the productivity will remain static.

When the gross investment is below depreciation, the net investment will be negative, and the production capacity gets reduced and starts to decline. During this period, the physical capital of the economy will be low.

Explanation of why gross investment cannot be less than zero

The gross investment in the economy can’t be less than zero. Firms can decide to invest or not invest depending on the economic state. If they decide not to invest, the gross investment will be zero, and if they do invest, then it will be positive. So, the minimum possible is zero, and it cannot be negative.

The depreciation of the existing capital stocks results in negative net investment (loss is more than additional gain in capital stock).