Monday, March 21, 2011

Student's question

Q: What's economy capital stock ? is that the same as gross invstment?  and if i buy built a house for 15000 ten years ago and sell it this year for 10000 how does it affect THIS YEAR GDP?


A: Capital stock is a stock variable, measuring the amount of capital at a certain time; while investment is a flow variable. Capital stock can be affected by investment. Actually two factors that influence capital stock are investment and depreciation. The capital stock will not affect GDP, which is a flow variable.

The problem you mentioned will not depend on the understanding of capital stock. Just note that the trade of the house will not affect this year's GDP, for nothing new is produced. Only purchase of new houses can be counted as investment.

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