Macroeconomics

‭○‬ ‭Construction projects, which may involve infrastructure development.‬ ‭○‬ ‭Additions‬‭to‬‭current‬‭inventories‬‭due‬‭to‬‭unsold‬‭output.‬‭For‬‭instance,‬‭a‬‭frm‬‭might‬‭produce‬ ‭an‬‭excess‬‭of‬‭products,‬‭such‬‭as‬‭fridges,‬‭that‬‭weren't‬‭sold‬‭during‬‭a‬‭particular‬‭year.‬‭These‬ ‭excess products are considered investments and will be added to the frm's inventories.‬ ‭GDP‬ ‭includes‬ ‭newly‬ ‭produced‬ ‭capital‬ ‭goods‬ ‭but‬ ‭ignores‬ ‭capital‬ ‭goods‬ ‭consumed‬ ‭in‬ ‭the‬ ‭production‬ ‭process.‬ ‭During‬ ‭production,‬ ‭capital,‬ ‭especially‬ ‭machinery,‬ ‭gradually‬ ‭wears‬ ‭out‬‭or‬ ‭depreciates‬ ‭.‬‭Since‬‭this‬‭depreciation‬‭is‬‭not‬‭accounted‬‭for,‬‭GDP‬‭may‬‭overstate‬‭an‬‭economy's‬‭real‬ ‭production‬‭because‬‭it‬‭does‬‭not‬‭consider‬‭the‬‭part‬‭of‬‭production‬‭that‬‭serves‬‭as‬‭a‬‭replacement‬‭for‬ ‭worn-out capital.‬

‭The‬‭amount‬‭by‬‭which‬‭an‬‭asset's‬‭value‬‭falls‬‭each‬ ‭period‬ ‭is‬ ‭referred‬ ‭to‬ ‭as‬ ‭depreciation‬ ‭.‬ ‭For‬ ‭example,‬ ‭a‬ ‭delivery‬ ‭van‬ ‭purchased‬ ‭by‬ ‭a‬ ‭frm‬ ‭may‬ ‭be‬ ‭expected‬ ‭to‬ ‭have‬ ‭a‬ ‭useful‬ ‭life‬ ‭of‬ ‭15‬ ‭years‬ ‭before‬ ‭becoming‬ ‭obsolete.‬ ‭The‬ ‭van‬ ‭steadily depreciates over that period.‬ ‭Net‬ ‭investment‬ ‭,‬ ‭on‬ ‭the‬ ‭other‬‭hand,‬ ‭takes‬‭into‬ ‭account‬ ‭the‬ ‭fact‬ ‭that‬‭some‬‭capital‬‭wears‬‭out‬ ‭and‬ ‭requires‬ ‭replacement‬ ‭.‬ ‭Therefore,‬ ‭net‬ ‭investment can be calculated as follows:‬

‭Net Investment = gross investment − depreciation.‬ ‭Net‬ ‭investment‬ ‭hence‬ ‭measures‬ ‭how‬ ‭much‬ ‭the‬ ‭stock‬‭of‬‭capital‬‭(productive‬‭capacity)‬‭changes‬ ‭during a period.‬ ‭○‬ ‭Positive‬ ‭net‬ ‭investment:‬ ‭When‬ ‭new‬ ‭capital‬ ‭produced‬ ‭is‬ ‭greater‬ ‭than‬ ‭the‬ ‭capital‬ ‭that‬ ‭wears out, the capital stock increases.‬ ‭○‬ ‭Negative‬ ‭net‬ ‭investment:‬ ‭When‬ ‭the‬ ‭capital‬ ‭that‬ ‭wears‬ ‭out‬ ‭exceeds‬ ‭the‬ ‭new‬ ‭capital‬ ‭produced, the capital stock decreases.‬ ‭An‬ ‭increase‬ ‭in‬ ‭net‬ ‭investment‬ ‭reflects‬ ‭an‬‭expansion‬‭in‬‭the‬‭economy’s‬‭productive‬‭capacity‬ ‭,‬ ‭whereas‬ ‭a‬ ‭decrease‬ ‭in‬ ‭net‬‭investment‬ ‭means‬‭that‬‭the‬‭economy‬‭is‬ ‭disinvesting‬‭because‬‭it‬‭is‬ ‭using more capital than what it is producing‬ ‭.‬ ‭●‬ ‭Government‬ ‭Spending‬ ‭(G)‬‭:‬ ‭Also‬ ‭known‬ ‭as‬ ‭government‬ ‭consumption‬ ‭and‬ ‭government‬ ‭purchases.‬ ‭This‬ ‭component‬ ‭includes‬ ‭government‬ ‭expenditures‬ ‭on‬ ‭items‬‭like‬‭public‬‭servants'‬ ‭salaries,‬ ‭military‬ ‭weaponry,‬ ‭and‬ ‭other‬ ‭government‬‭spending.‬‭It‬‭represents‬‭the‬ ‭public‬‭sector's‬ ‭contribution‬‭to‬‭economic‬‭activity‬ ‭.‬‭This‬‭component‬‭also‬ ‭excludes‬‭transfer‬‭payments‬ ‭because‬ ‭they are not purchases of anything currently produced.‬ ‭●‬ ‭Net‬‭Exports‬‭(X‬‭−‬‭M)‬‭:‬ ‭Net‬‭exports‬‭are‬‭calculated‬‭by‬ ‭subtracting‬‭the‬‭total‬ ‭value‬ ‭of‬‭imports‬‭(M)‬ ‭from‬‭the‬‭total‬ ‭value‬ ‭of‬‭exports‬‭(X)‬ ‭.‬ ‭Exports‬ ‭represent‬‭goods‬‭and‬‭services‬‭produced‬ ‭for‬‭foreign‬

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