Q. “A reduction in the value of an asset over time, due in particular to wear and tear” is called as?

[A] Depreciation

[B] Inflation

[C] Appreciation

[D] Gross Capital Formation

Answer: A

Explanation: A significant part of current output of capital goods goes in maintaining or replacing part of the existing stock of capital goods.

  • This is because the already existing capital stock suffers wear and tear and needs maintenance and replacement.
  • A part of the capital goods produced this year goes for replacement of existing capital goods and is not an addition to the stock of capital goods already existing and its value needs to be subtracted from gross investment for arriving at the measure for net investment.
  • This deletion, which is made from the value of gross investment in order to accommodate regular wear and tear of capital, is called depreciation.

Source: NCERT – Macro economics