Correct Option
The correct option is 1 and 3 only.
Explanation
In macroeconomics, Investment (or Capital Formation) refers to the addition to the physical stock of capital in an economy during a given period. It is essential to distinguish between the total expenditure on capital goods (Gross Investment) and the actual increase in the productive capacity (Net Investment).
Statement-wise Analysis
- Statement 1 is Correct: Gross investment represents the total value of capital goods produced during a year. It includes two components: Net Investment (addition of new assets) and Depreciation (replacement investment). Replacement investment refers to the capital goods produced to replace the existing capital stock that has been worn out or become obsolete. Therefore, Gross Investment includes the value of replacement capital.
- Statement 2 is Incorrect: Net investment measures the actual addition to the capital stock of the economy. It is calculated by subtracting depreciation (consumption of fixed capital) from gross investment. The relationship is expressed as:
Net Investment = Gross Investment - Depreciation. - Statement 3 is Correct: In economic theory, investment strictly refers to the creation of new physical capital assets (such as machinery, factories, infrastructure, and inventory) that expand the economy's productive capacity. This is distinct from financial investment (like buying existing shares or bonds), which is merely a transfer of ownership rights and does not add to the nation's physical capital stock.
Key Takeaway
Gross Investment includes expenditure on replacing worn-out assets (Depreciation), whereas Net Investment excludes depreciation to reflect the actual increase in capital stock. In economics, investment implies Capital Formation (creation of new productive assets), not the purchase of financial instruments.