Gross investment

Gross investment
See also
Sum of years digits method Real value Capital turnover Depreciation of fixed assets Global demand Non-operating expense Activity measure Effective demand Amortization of intangible assets

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.

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.