Stocks, flows and investment

Economists divide quantities into stocks and flows:

• A stock is measured at a point of time: the capital (machines, buildings) a country has on 31 March, the water in a tank.
• A flow is measured over a period: income, output, investment per year, the water running into the tank per minute.

Gross investment is the part of a year's final output made of capital goods: new machines, buildings, tools.

But capital wears out. Depreciation is the annual allowance for this wear and tear: cost of the capital good ÷ years of useful life. A ₹12 lakh machine that lasts 10 years depreciates by ₹1.2 lakh a year. It is an accounting idea: no money is actually paid out.

Net investment = gross investment − depreciation. It is the new addition to the capital stock.

For economists, investment means adding to real capital (machines, buildings), not buying shares. Producing more capital goods today means the economy can produce more, including more consumer goods, in the future.