Q.The wear and tear of capital is called
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Depreciation Calculation – A First Look
You own a smartphone you bought for ₹30,000. After a year, if you tried to sell it, you’d get maybe ₹20,000. That ₹10,000 drop isn’t a loss of cash from your pocket — it’s the wear and tear of the phone’s value. In economics, when a factory buys a machine for ₹10 lakh, that machine doesn’t stay worth ₹10 lakh forever. It rusts, breaks down, becomes outdated. The gradual loss in value is depreciation.
The Precise Meaning
In your NCERT Class 12 Macroeconomics textbook (Chapter 2, National Income Accounting), depreciation is defined as:
Depreciation is the fall in the value of a fixed asset due to normal wear and tear, passage of time, or expected obsolescence.
It is not a cash expense — no money leaves the firm when depreciation happens. But it is a cost that must be accounted for, because using a machine today reduces its future usefulness. Without depreciation, a firm would overstate its profit and a country would overstate its national income.
Why It Matters
- For a firm: Depreciation is subtracted from revenue to find true profit. If you ignore it, you think you earned more than you really did.
- For the economy: Gross Domestic Product (GDP) counts all final goods produced. But some of that production is just replacing worn-out machines. Net Domestic Product (NDP) = GDP – Depreciation. NDP tells us how much new value was actually added.
The Formula (NCERT Standard)
The NCERT textbook gives one standard method for calculating depreciation — the Straight Line Method. It is simple and exam-relevant.
Depreciation=Estimated Life of AssetCost of Asset−Scrap Value
Where:
- Cost of Asset = purchase price + installation/transport costs (the total initial investment)
- Scrap Value = the estimated resale value at the end of its life (could be zero)
- Estimated Life = number of years the asset is expected to be used
Example: A machine costs ₹1,00,000, has a scrap value of ₹10,000, and a life of 10 years.
Depreciation per year=101,00,000−10,000=1090,000=₹9,000
Each year, the firm records ₹9,000 as depreciation. After 10 years, the machine’s book value becomes ₹10,000 (the scrap value).
A Word on Other Methods …
Capital assets like machinery and buildings lose value every year simply through use and age — this loss is tracked separately in national income accounting. …
The correct option is (c) depreciation.
Capital goods (machines, buildings, equipment) lose value every year simply from being used and from becoming technologically outdated. This loss in value of fixed capital is called depreciation or consumption of fixed capital. It is deducted from Gross Investment to arrive at Net Investment (Net Investment = Gross Investment − Depreciation), and it is deducted from GNP to arrive at NNP.
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Showing the 12 most recent of 18 on this concept.
- CBSE 2025Set 58/5/11 markMCQQ.To arrive at the value of Net Value Added at Market Price (NVA_MP), ________ must be ________ to/from Gross Value Added at Market Price (GVA_MP). (Choose the correct option to fill in the blanks) (A) depreciation, added (B) depreciation, subtracted (C) net indirect taxes, subtracted (D) net indirect taxes, added
›Reveal solutionSolution
Net Value Added at Market Price (NVA_MP) is simply Gross Value Added at Market Price (GVA_MP) minus the consumption of fixed capital (depreciation). The correct fill is "depreciation, subtracted."
The relationship between gross and net value added is one of the most fundamental accounting identities in national income. Think of it this way: when a firm produces output, its machinery, buildings, and equipment wear out over time. That wear and tear — depreciation — is a real cost of production, even though no cash leaves the firm in that period. Gross Value Added counts the total value of output before accounting for this capital consumption. Net Value Added, on the other hand, gives us the fresh value created in the period — the output that remains after setting aside enough to replace the worn-out capital.
So the bridge between the two is straightforward:
NVAMP=GVAMP−Depreciation
Depreciation is subtracted from the gross figure to arrive at the net figure. This is true whether we are talking about market price or factor cost — the subtraction of depreciation is always the step that converts gross to net. …
- CBSE 2025Set ANNUAL1 markMCQQ.Which one is true? (A) GNP = GDP + Depreciation (B) NNP = GNP + Depreciation (C) NNP = GNP - Depreciation (D) GNP = NNP - Depreciation
›Reveal solutionSolution
NNP = GNP - Depreciation, so the answer is (C).
Depreciation (consumption of fixed capital) is the wear and tear of capital during production. The net value of output is obtained by deducting depreciation from the gross value, so NNP = GNP - Depreciation (and equivalently GNP = NNP + Depreciation). Option (A), (B) and (D) state the relationship wrongly. Hence the correct identity is (C). Converting gross to net …
- CBSE 2025Set ANNUAL1 markMCQQ.What is consumption of fixed capital called? (A) Capital formation (B) Depreciation (C) Investment (D) All of these
›Reveal solutionSolution
Consumption of fixed capital is called depreciation, so the answer is (B).
Depreciation, also termed consumption of fixed capital, is the fall in the value of fixed assets due to normal wear and tear, passage of time and expected obsolescence during production. It is deducted from gross measures to get net measures (e.g. NNP = GNP - depreciation). Capital formation (A) and investment (C) refer to addi …
- CBSE 2025Set ANNUAL1 markMCQQ.Which one of the following is true? Net investment is equal to(a) Gross Investment - Cost(b) Gross Investment - Depreciation(c) Gross Investment - Marginal Investment(d) Gross investment - Net Profit
›Reveal solutionSolution
Net Investment = Gross Investment − Depreciation, so the answer is (b).
Gross investment is the total addition to the capital stock during a year, including the part that merely replaces worn-out capital. Depreciation (consumption of fixed capital) is the value of capital used up in production. Net investment is the actual net addition to the capi …
- CBSE 2025Set ANNUAL1 markMCQQ.Choose the correct statement.(a) NDPmp is estimated as the difference between GDPmp and depreciation.(b) NDPmp is estimated as the difference between GDPmp and Net Indirect taxes.(c) NDPmp is estimated as the difference between Depreciation and Mixed income.(d) NDPmp is estimated as the difference between Depreciation and Net Indirect taxes.
›Reveal solutionSolution
NDPmp = GDPmp − Depreciation; none of the other listed pairs give this identity.
GDPmp (Gross Domestic Product at market price) includes the full value of goods and services produced in a year, but part of the capital stock (machinery, buildings) is used up in the process of production. This wear-and-tear is called Depreciation or Consumption of Fixed Capital.
- NDPmp = GDPmp − Depreciation. This is the standard identity every MZ Class-12 Economics / Macroeconomics syllabus (closely following the NCERT/CBSE curriculum) tests directly. …
- CBSE 2024Set MARCH1 markMCQQ.NNP = GNP –(a) a) Deduction(b) b) Depreciation(c) c) Investment(d) d) Capital
›Reveal solutionSolution
NNP = GNP minus depreciation (consumption of fixed capital), so the answer is (b).
Gross National Product (GNP) is the total value of final goods and services produced by the normal residents of a country in a year, including net factor income from abroad, measured gross of depreciation. During production, capital assets like machines wear out; this loss of value is depreciation (consumption of fixed capital). When depreciation is subtra …
- CBSE 2024Set MARCH1 markQ.How does you get net value added?
›Reveal solutionSolution
Net value added = Gross value added − Depreciation.
Gross value added (GVA) by a firm is the value of its output minus the value of intermediate goods it used. But in producing that output some fixed capital wears out; this loss is depreciation (consumption of fixed capital). To get the net contribution of the firm to national output, we deduct depreciation from gros …
- CBSE 2024Set ANNUAL1 markQ.Very short answer:(ii) How is net investment determined?
›Reveal solutionSolution
Net investment = Gross investment − Depreciation; it is the true addition to the capital stock.
Gross investment is the total addition to the capital stock in a year, but a part of it only replaces capital goods that have worn out during production (depreciation, or consumption of fixed capital). To measure the genuine increase in the capital stock, we subtract depreciation from gross investment.
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- CBSE 2023Set ANNUAL1 markQ.Fill in the blank: Substract _______ from grass investment then get net investment.
›Reveal solutionSolution
Net investment = gross investment − depreciation, so the blank is depreciation.
Gross investment measures total spending on new capital goods. Part of that merely replaces capital worn out during the year — this is depreciation (consumption of fixed capital). What is left after deducting depreciation is the genuine net addition to the …
- CBSE 2023Set ANNUAL1 markQ.What is the other name of depreciation?
›Reveal solutionSolution
Depreciation = Consumption of Fixed Capital — the expected, normal loss in the value of fixed assets used up in production every year.
When a firm uses machinery, equipment or buildings to produce goods and services, these fixed assets gradually lose value because of normal wear and tear in use, and because they become technologically outdated (obsolescence) over time. This expected annual fall in value is what national-income accounting calls Consumption of Fixed Capital — it represents the fixed capital that is literally "consumed up" in the process of producing the year's output, just as raw material is consumed. It is distinguished from an unexpected, abnormal loss (e.g. a fire or an earthquake destroying a factory), which is called capital loss and is not treated as depreciation. The distinction matters because deducting depreciation …
- CBSE 2022Set ANNUAL1 markMCQQ.Net investment is equal to(a) gross investment + depriciation(b) gross investment – depreciation(c) gross investment – indirect taxes(d) None of the above
›Reveal solutionSolution
Net investment = Gross investment − Depreciation.
Gross investment is the total expenditure on capital goods (machinery, buildings, etc.) during a year, including the amount spent merely to replace capital that wore out (depreciation/consumption of fixed capital) while producing that year's output. Net investment removes this replacement component and shows the actual addition to the economy's capital stock.
Gross investment = Net investment + Depreciation
∴ Net investment = Gross investment − Depreciation
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- CBSE 2022Set ANNUAL1 markQ.What do you understand by depreciation of capital?
›Reveal solutionSolution
Depreciation is the normal, foreseeable wearing-out of fixed capital (machines, buildings, equipment) over time due to use and age; it is treated as a cost of production and subtracted from gross estimates to get net estimates of income/product.
Every fixed capital asset used in production — plant, machinery, buildings, vehicles — undergoes continuous wear and tear as it is used year after year. Assets also lose value simply from the passage of time (ageing) and because they may become technologically outdated (normal/foreseeable obsolescence) even before they physically wear out. This expected, normal loss in the value of fixed capital over an accounting year is called depreciation, or 'consumption of fixed capital'.
Depreciation is distinguished from capital loss, which is an abnormal, unforeseen loss (e.g., due to fire, flood, or earthquake) and is not treated as depreciation. In national income accounting, depreciation is treated as a genuine cost of production, since capital must eventually be replaced to maintain the economy's productive capacity. Hence:
- Gross figures (Gross Domestic Product, Gross National Product) include the value of this wear and tear. …
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