Economy and its processes (Gross Investment Vs Net Investment ( A…
Economy and its processes
Income earning, spending, and saving activities are called economic activities
Spending for satisfaction of wants is consumption activity
Spending for producing more is Investment activity
The areas in which the consumption activity and investment activity takes place is called an
: The work places where people work are called production units, which are the sources of livelihood to the people working there. Some get wages and salaries, some get rent by renting out properties, some get interest by lending money. And the owner of these production units get profit. All these production units together make an
What does an Economy provide?
Economy provides goods and services
Goods and services are classified into two types:
a) Consumer goods and services
Those goods which directly satisfy human wants are called consumer goods. a) Single use consumer goods b) Durable use consumer goods
Ex: Services of a barber for hair-cut, tailor for stitching clothes, services of schools and colleges, services of doctors, services of banks, postal and transport services etc.,
b) Producer goods and services
Those goods which are used to produce more goods are called producer goods. Machines, tools, buildings, raw material etc., are all producer goods. a) Single use producer goods b) Durable use producer goods
The production units not only require goods but also services. Ex: Services like banking, transport, insurance, advertising, etc.,
Vital Processes of an economy
General meaning of production is making of goods in a factory such as machines, televisions, cloth, medicines etc., or growing crops on farms.
In economics, the word 'production' has much wider meaning. It includes not only making of various goods but also the services.
Examples: Television or radios cannot be used unless the services of artists or technicians are provided; a train or a bus is a good which cannot be used without the service of a driver;
Consumption is defined as an activity concerned with using of goods and services for direct satisfaction of wants.
a) Goods lying with production units
The producers have to keep some stock of finished goods ready in anticipation of demand from the market. So a part of the production of the year is used up in building stock of finished and semi-finished goods and raw material with the production units. This represents one component of total production of the year which is not used for consumption.
b) Durable use goods acquired by the production unit
Production units makes investment in fixed capital goods like new machines, equipment, vehicles, buildings, etc., during the year. There are durable use goods
This is another component of production of the year not used for consumption during the same year.
The excess of production over consumption equals investment
The two components responsible for the excess are:
a) Investment in stock
b) Investment in fixed capital
Stock Investment Vs Fixed Investment
Additions of stock of raw material, semi-finished goods and finished goods during a year is called stock investment or inventory investment.
Such a stock at the beginning of the year is called
The stock that exists at the end of the year is called
The excess of closing stock over the opening stock is called
It is possible that during a particular year the production may be less than consumption. It implies that the closing stock is less than the opening stock. This is called negative investment or disinvestment.
Acquiring up of durable use producer goods by production units is called
It amounts to adding new machines, equipment etc.,
Total investment = sum of inventory investment and fixed investment.
The alternate name for investment is
Gross Investment Vs Net Investment
A production unit possesses some fixed capital.
This fixed capital is in the form of machines, tools, factory, building etc.,
When this fixed capital used in production, some wear and tear take place during the year; some accidental damage may also take place. All these reduce the value of fixed capital.
The loss of value of fixed capital due to wear and tear in use and due to expected obsolescence is called
depreciation or consumption of fixed capital.
Net Investment = Gross Investment - Depreciation