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capital good. In other words it is the cost of the good divided by number of years of its useful life. Notice here that depreciation is an accounting concept. No real expenditure may have actually been incurred each year yet depreciation is annually accounted for. In an economy with thousands of enterprises with widely varying periods of life of their equipment, in any particular year, some enterprises are actually making the bulk replacement spending. Thus, we can realistically assume that there will be a steady flow of actual replacement spending which will more or less match the amount of annual depreciation being accounted for in that economy. Now if we go back to our discussion of total final output produced in an economy, we see that there is output of consumer goods and services and output of capital goods. The consumer goods sustain the consumption of the entire population of the economy. Purchase of consumer goods depends on the capacity of the people to spend on these goods which, in turn, depends on their income. The other part of the final goods, the capital goods, are purchased by business enterprises. They are used either for maintenance of the capital stock because there are wear and tear of it, or they are used for addition to their capital stock. In a specific time period, say in a year, thetotal production of final goods can thus be either in the form of consumption or investment. This implies that there is a trade-off. If an economy, produces more of consumer goods, it is producing less of capital goods and vice- versa. It is generally observed that more sophisticated and heavy capital goods raise the ability of a labourer to produce goods. The traditional weaver would take months to weave a sari but with modern machinery thousands of pieces of clothing are produced in a day. Decades were taken to construct the great historical monuments like the Pyramids or the Taj Mahal but with modern construction machinery one can build a skyscraper in a few years. More production of newer varities of capital goods therefore would help in the greater 13 production of consumer goods. N But aren’t we contradicting ourselves? Earlier we have seen how, of the total t output of final goods of an economy, if a larger share goes for production of n capital goods, a smaller share is available for production of consumer goods. l n And now we are saving more capital goods would mean more consumer goods. m There is no contradiction here however. What is important here is the element of e time. At a particular period, given a level of total output of the economy, it is c true if more capital goods are produced less of consumer goods would be u t produced. But production of more capital goods would mean that in future the g labourers would have more capital equipments to work with. We have seen that this leads to a higher capacity of the economy to produce with the same number of labourers. Thus total input itself would be higher compared to the case when less capital goods were produced. If total output is higher the amount of consumer goods that can be produced would surely be higher. 2 Depreciation does not take into account unexpected or sudden destruction or disuse of capital as can happen with accidents, natural calamities or other such extraneous circumstances. 3We are making a rather simple assumption here that there is a constant rate of depreciation based on the original value of the asset. There can be other methods to calculate depreciation in actual practice. Reprint 2026-27