What does the word gross mean in this context? It indicates that investment includes all investment goods produced. Gross investment is not adjusted for depreciation, which measures the amount of capital that has been used up in a year. Thus gross investment includes all the machines, factories, and houses built during a year even though some were bought simply to replace some old capital goods that burned down or were thrown on the scrap heap.
If you want to get a measure of the increase in society's capital, gross investment is not a sensible measure. Because it excludes a necessary allowance for depreciation, it is too large too gross.The same point holds for capital. To find the net increase in capital, you must start with gross investment and subtract the deaths of capital in the form of depreciation, or the amount of capital used up.
Thus to estimate capital formation we measure net investment. Net investment is always births of capital less deaths of capital. Net investment equals gross investment minus depreciation. I think this answer will satisfy this question to some extent.
If you want to get a measure of the increase in society's capital, gross investment is not a sensible measure. Because it excludes a necessary allowance for depreciation, it is too large too gross.The same point holds for capital. To find the net increase in capital, you must start with gross investment and subtract the deaths of capital in the form of depreciation, or the amount of capital used up.
Thus to estimate capital formation we measure net investment. Net investment is always births of capital less deaths of capital. Net investment equals gross investment minus depreciation. I think this answer will satisfy this question to some extent.
