Use the information below to compute the levels of gross and net private domestic

investment.

Data are in billions of dollars.

Change in business inventories $ 59.3

Residential construction 369.6

Producers’ durable equipment 691.3

Nonresidential structures 246.9

Depreciation 713.9

Solution:

Gross private domestic investment= Change in business inventories + Residential construction

+ Producers’ durable equipment + Nonresidential structures.

Net private domestic investment= Gross private domestic investment-Depreciation

Depreciation= $713.9

Gross private domestic investment= $59.3 + $369.6 + $691.3 + $246.9= $1,367.1

Net private domestic investment= $1,367.1-$713.9= $653.2.

With the above calculation, we can conclude that the Net private domestic investment= $653.2

and the Gross private domestic investment= $1,367.1 in billion dollars.

A car company currently has a capital stock of $100 million and desires a capital stock of

$110 million.

a. If it experiences no depreciation, how much will it need to invest to get to its desired level

of capital stock?

Depreciation = 0%

110-100=10
The desired investment that will be added to the available capital = $10 million

b. If its annual depreciation is 5%, how much will it need to invest to get to its desired

level?

Depreciation = 5%

Depreciation on the available capital stock = 5/100 * 100 =$5 million

Additional Investment = Depreciation + $10 million

= $5 million + $10 million

= $15 million

c. If its annual depreciation is 10%, how much will it need to invest to get to its desired

level?

Depreciation = 10%

Depreciation on available stock = 10/100 * 100 = $10 million

Additional Investment = Depreciation + $10 million

= $10 million + $10 million

= $20 million

If savings dropped sharply in the economy, what would likely happen to investment. Why?

If savings dropped sharply in the economy, the number of investments will also drop. This is

because investments are usually equal to forgone consumption which is savings (equilibrium or

no equilibrium). A reduction in savings by private individuals, private firms or governments

leads to a reduction in investments. (Rittenberg & Tregarthen, 2012).

Reference:

Rittenberg, L., and Tregarthen, T. (2012). Macroeconomics Principles V. 2.0. Licensed under

Creative Commons by-nc-sa 3.0 (https://creativecommons.org/licenses/by-nc-sa/3.0/)