Explain INVESTMENT ||| Indian economy.

INDIAN ECONOMY.

That part of the final output which comprises of physical capital goods is called gross 

investment. So, investment in a country is not measured as money put in a business or any 

economic activity but it is basically that portion of the final output (GDP) which consists of 

capital goods.

Suppose there is only one factory (capital good) in a country, which is worth Rs. one lakhs 

and is producing consumption goods worth Rs. 700 and capital goods worth Rs. 300 in a 

particular year (say 2019-20) in an economy. This means that the GDP in 2019-20 will be 

Rs. 1000 (which is the total production of both consumption and capital goods) and the 

gross investment in the economy will be Rs. 300 or (Rs 300/Rs1000) 30%, as investment is 

measured as the percentage of output which consists of capital goods.

Now when the factory runs for a year then wear and tear happens in the factory which is 

called depreciation. Depreciation is also defined as consumption of physical capital. In the 

above example Rupees one lakh worth of capital goods produce Rs. 700 consumption goods 

and Rs. 300 capital goods, but during this production process suppose there is wear and 

tear of Rs. 50 in the factory. This implies that to produce Rs. 700 of consumption goods and 

Rs. 300 of capital goods there is a loss of Rs. 50 of capital goods in the economy i.e. net 

production of capital goods (investment) in the economy is Rs. 300 minus Rs. 50.

Net Investment = Gross Investment - Depreciation

 = Rs. 300 - Rs. 50

 = Rs. 250

The following chart represents gross fixed capital formation (investment) of India in the last 

few years.