What is net investment?

Net investment refers to the actual increase in an economy's physical assets after accounting for depreciation. It is calculated as total investments in capital goods (such as machinery, buildings, technology) minus the depreciation of those assets over a specified period.

When businesses invest in new equipment or infrastructure, they are making gross investments. However, as these assets are used over time, they lose value due to wear and tear, which is captured through depreciation. By subtracting depreciation from total investments, we can determine the net investment, which reflects the true growth in productive capacity.

Understanding net investment is crucial for evaluating the health of an economy or a specific sector within it. It shows not just how much is being spent on new assets but also how effectively those investments contribute to economic growth. If net investment is positive, it suggests that the economy is expanding its capital stock, while negative net investment indicates a declining capacity to produce.