Gross investment

Gross investment - includes production of new capital goods and improvement of existing capital goods, e.g. construction of roads, bridges, buildings and structures, purchase of machinery, technical equipment and tools, means of transport, purchase of a license to manufacture products. Investments are most often carried out through the purchase of goods and services by enterprises. Less often, however, they are implemented by households and state institutions.

The gross value of investments consists of the value of purchased and produced fixed assets reduced by the value of fixed assets sold or transferred free of charge in the accounting year and increased by the difference in the value of the basic stock.

The depreciation ratio to the gross investment shows whether the country has carried out investments at a level allowing for the reconstruction of the used part of the property.

Gross investment in the System of National Accounts

In statistical terms, the term: gross capital expenditure, which is one of the categories of the National Accounts System, is a common and more precise term.

Gross investment expenditures in the National Accounts System constitute the entire investment outlay incurred, serving both the reconstruction of the productive assets consumed in the production process and the increase of the resources of this property. These expenditures are a component of the so-called the equation of GDP distribution, i.e. the formula showing the final division of produced in the country production and import between different types of demand. They are part of gross capital formation with inventory change.

The GDP distribution equation takes the form of: GDP = C + G + I + ΔR + (E - M)

Where:

C - individual consumption

G - collective consumption

I - investments (gross investment outlays)

ΔR - change in inventory

E - export

M - import

Gross investment and net investments

Gross investments are closely related to the gross investment, which are gross investments less depreciation of the existing capital stock. Depreciation is an economic reflection of the process of consuming the existing capital stock, more precisely - it reflects the equivalent of the consumption of capital in a given period. The consumption of physical capital means that some of the goods produced in the economy (ie capital goods) should be spent on the reconstruction of the used capital. To sum up - part of the total investment (ie gross investment) must be spent on restoring the used capital stock in sizes corresponding to depreciation. The remaining part of the investment (ie net investment) can be used to increase the existing capital stock.

We determine total assets growth in fixed assets as gross investments, while net investments are gross investments less the diminishing value of fixed assets in the period under consideration (depreciation and other deductions of fixed assets). When the value of depreciation write-offs and other decreases in fixed assets (e.g. sales) is higher than the gross investment, then we are dealing with decapitalization of fixed assets.

Gross investment = Net investment + depreciation

Where:

Gross investment - this is the total investment within 1 year. Net investments - are all investments that increase the capital stock within 1 year. Depreciation - these are all investments that do not increase the capital stock, but only reproduce its amount consumed within one year.

Gross investment and production measures

Gross Domestic Product and Gross National Product are production measures that include gross investments. Due to the difficulty in estimating depreciation on a macroeconomic scale, economic analyzes use GNP and GDP more often, despite the fact that National Product Net (national income) better reflects income generated in the economy.

Examples of Gross investment

• Construction of roads, bridges, buildings and structures: Investment in construction of roads, bridges, buildings and structures is a form of gross investment. Construction of roads, bridges and buildings requires the purchase of materials, labour and equipment to build the structures. An example of this would be the construction of a new bridge in a city.
• Purchase of machinery, technical equipment and tools: Investment in the purchase of machinery, technical equipment and tools is another form of gross investment. This could include the purchase of a new production line for a factory or a fleet of trucks for a transportation business. An example of this would be the purchase of a new CNC machine for a manufacturing plant.
• Purchase of a license to manufacture products: Investment in the purchase of a license to manufacture products is another form of gross investment. This could include the purchase of a patent or trademark to produce a product. An example of this would be the purchase of a license to produce a new type of medical device.

Advantages of Gross investment

Gross investment is an important part of a healthy economy, providing a number of advantages. These include:

• Increased Productivity: Investment in capital goods leads to increased productivity as businesses can produce more with fewer resources. This leads to increased profit margins, increased wages, and increased economic output.
• Job Creation: Investment in capital goods creates jobs for people in the manufacturing, installation, and maintenance sectors, as well as other associated industries.
• Economic Growth: Investment in capital goods leads to increased economic growth as businesses expand and generate more tax revenue.
• Improved Quality: Investment in capital goods leads to improved quality of goods and services as businesses are able to produce higher quality products using better technology and materials.
• Increased Competitiveness: Investment in capital goods increases the competitiveness of businesses, as they are able to produce goods at lower costs and with better quality.

Limitations of Gross investment

Gross investment has several limitations:

• It does not account for depreciation of existing capital goods, making it an incomplete measure of investment.
• It does not include investments in intangible assets, such as research and development, software, and intellectual property.
• It does not include investments in human capital, such as education, training, and health care.
• It does not account for investments in public infrastructure and other public goods, such as roads, bridges, and other public works.
• It does not consider the impact of investment on the environment, as it does not account for the negative externalities of production and consumption.
• It does not account for changes in the purchasing power of money over time, meaning the data can be inaccurate when measuring the total amount of investment.

Other approaches related to Gross investment

Gross investment is an important factor in economic growth and development. There are several approaches related to gross investment that can be used to measure and analyze its effects. These approaches include:

• Investment in human capital - investments in human capital such as education, training, and health care can have a significant impact on economic growth and development.
• Investment in physical capital - investments in physical capital such as machinery, equipment, and buildings can directly increase productivity and economic growth.
• Investment in public infrastructure - investments in public infrastructure such as roads, bridges, and utilities can create jobs and spur economic growth.
• Investment in financial capital - investments in financial capital such as stocks, bonds, and mutual funds can help to grow the economy by increasing liquidity and providing capital to businesses.

In summary, there are many approaches related to gross investment that can be used to measure and analyze its effects. These approaches include investments in human capital, physical capital, public infrastructure, and financial capital.

Gross investment — recommended articles

Capital turnover — Capital resource — Commercial facility — Sum of years digits method — Economic obsolescence — Economic income — Physical asset — Non-operating expense — Service economy

References

• Jorgenson, D. W. (1963). Capital theory and investment behavior. The American Economic Review, 53(2), 247-259.
• Hall, R. E., & Jorgenson, D. W. (1967). Tax policy and investment behavior. American economic review, 57(3), 391-414.
• Towne, M., & Rasmussen, W. (1960). Farm gross product and gross investment in the nineteenth century. In Trends in the American economy in the nineteenth century (pp. 255-316). Princeton University Press.