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1. Classification of Goods

Final Goods are those goods which have crossed the boundary line of production, and are ready for use by their final users. Example: Shoes used by the households, or tractor used by the farmers. Final goods must lead to either final consumption expenditure or investment expenditure in the economy.

Intermediate Goods are those goods which are purchased by one firm from the other for resale or for use as raw material in the production of other goods. Example: Wood used in the production of chairs.

Consumption Goods are those goods which are directly used for the satisfaction of human wants. Example: Milk and ice cream used by the households.

Capital Goods are fixed assets of the producers and are repeatedly used in the process of production. These are durable-use producer goods and are of high value. Example: Plant and machinery.

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2. Consumption Expenditure is the aggregate consumption expenditure in the economy.

Components: (i) Consumption expenditure by the households, (ii) Consumption expenditure by the government, (iii) Consumption expenditure by the non-profit private institutions.

3. Investments is a process of adding to the stock of capital.

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Components: (i) Fixed investment, and (ii) Inventory investment.

Fixed Investment is addition to the stock of fixed assets of the producers during an accounting year. Inventory Investment is addition to the stock of inventory with the producers during an accounting year.

4. Gross Investment is the expenditure on the purchase of fixed assets and expenditure on the inventory stock of the producers during the accounting year.

Net Investment refers to increase in the stock of capital during an accounting year.

Net Investment Gross investment-Depreciation

5. Depreciation (also called consumption of fixed capital) refers to loss of value of fixed assets in use, on account of (i) normal wear and tear, (ii) accidental damages, and (iii) expected (or foreseen) obsolescence.

Depreciation Reserve Fund refers to that fund which the producers keep to cope w depreciation losses in the process of production.

6. Stocks are the quantities which are measured at a point of time. Example: Your account as on January 1, 2021 dance in the bank.

Flows are the quantities which are measured over a specified period of time. Example: four income per month.

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7. Four Sectors of the Economy

Household Sector refers to consumers engaged in the consumption of goods and services.

Producing Sector refers to all producing units (or firms) in the economy.

Government Sector refers to government as a welfare agency (engaged in mating law and order, defence, and other services of public welfare). It also refers to government as a producer.

The External Sector also called ‘Rest of the World Sector is engaged in the export and import of goods and the flow of capital between the domestic economy and rest of the world.

8. Circular Flow of Income refers to the circularity of the flows of production, income and expenditure across different sectors of the economy.

Real Flows refer to the flow of goods and services across different sectors of the economy.

Money Flows refer to the flow of money in terms of receipts and payment different sectors of the economy.

Significance: Circular flow models are significant as they :

(i) Facilitate estimation of national income.

(ii) show interdependence among different sectors highlighting circularity of intersectional flows.

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Table of Contents

BASIC CONCEPTS OF MACROECONOMICS CLASS 12

Choose the correct option:

1. Consumption of all goods and services in the economy during the period of an accounting year is known as:

(a) aggregate demand

(b) aggregate supply

(d) none of these

2. Classification of goods depend on the

(a) consumption

of goods

(b) production of goods

(d) end-use of goods

3. Final goods are used by the:

(a) consumers

(b) producers

(d) all of these

4. Those goods which satisfy human wants directly are called:

(a) intermediate goods

(b) consumer goods

(d) none of these

5. Capital goods are those goods:

(a) which are used in the production process for several years

(b) which are used in the production process for few years

(d) both (a) and (c)

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6. Food processor used by the households in their kitchen is an example of

(a) capital goods

(b) intermediate goods

(d) none of these

7. In the production of sugar, sugarcane is:

(a) a final good

(b) a capital good

(d) none of these

8. If a car is purchased by a taxi-operator, it will be regarded as a:

(a) capital good

(b) intermediate good

(d) both (a) and (c)

9. T.V., radio, washing machine, etc., are examples of:

(a) durable consumer goods

(b) semi-durable consumer goods

(d) capital goods

10. Which of the following is a semi-durable good?

(a) Radio

(b) Clothes

(d) Petrol

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11. Increase in the stock of capital is known as:

(a) capital loss

(b) capital gain

(d) none of these

12. Net investment is equal to:

(a) gross vestment + depreciation

(b) gross investment – depreciation

(d) gross investment ÷ depreciation

13. Net capital formation causes:

(a) increase in production capacity

(b) increase in depreciation

(d) increase in cost

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14. Which of the following leads to depreciation?

(a) Normal wear and tear

(b) Damages due to floods

(d) None of these

15. Which of the following leads to unexpected obsolescence?

(a) Change in demand

(b) Natural calamities

(d) None of these

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16. Which of the following is the cause of expected obsolescence?

(a) Natural calamities

(b) Change in demand

(d) Both (b) and (c)

17. Depreciation reserve fund is needed for:

(a) inventory stock

(b) advertisement

(d) none of these

18. A stock variable:

(a) has no time dimension

(b) is a static concept

(d) none of these

19. A quantity measured per unit of time period is known as:

(a) stock variable

(b) flow variable

(d) none of these

20. Income of the family is the example of which variable?

(a) Stock

(b) Flow

(d) Neither stock nor flow

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21. Which of the following is a stock variable?

(a) Interest on capital

(b) Distance between Delhi and Manali

(d) none of these

22. Which of the following is not a flow variable?

(a) Income

(b) Capital formation

(d) Leakage of water from the overhead tank

23. A car running between Delhi and Agra at a speed of 120km /h includes:

(a) only stock variables

(b) only flow variables

(d) none of these

24. Factor services rendered by the households to the firms lead to:

(a) real flow

(b) money flow

(d) both (a) and (c)

25. Reason for the circular flow of income is:

(a) government intervention

(b) production of goods and services

(d) invention of money

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Answers

1. (c)	11. (c)	21. (b)
2. (d)	12. (b)	22. (c)
3. (d)	13. (a)	23. (c)
4. (b)	14.(a)	24. (a)
5. (d)	15. (b)	25. (c)
6. (c)	16. (d)
7. (c)	17. (c)
8. (d)	18. (c)
9. (a)	19. (b)
10. (b)	20. (b)

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MATCH THE FOLLOWING

I. From the set of statements given in Column I and Column II, choose the correct pair of statements:

Column I	Column II
(a) Intermediate goods (b) Final goods (c) Higher production of capital goods (d) Gross investment (e) Monetary expenditure	(i) Shirts purchased by firm X from firm Y for final consumption (ii) Have crossed the boundary line of production (iii) Higher level of welfare of the people (iv) Net addition to the existing capital stock (v) A stock concept

Answer : (b) Final goods – (ii) Have crossed the boundary line of production

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II Identify the correct sequence of alternatives given in column II by matching them with respective items in Column I.

Column I	Column II
(a) Cement production (b) Final goods (c) Fixed Investment (d) Intermediate goods (e) Capital Goods	(i) Raises productive capacity of the producers (ii) Resold by the firms for profit during the accounting year (iii) Fixed assets of the producers (iv) Included in the estimation of national product (v) A flow variable

Answers

(a) – (v), (b) – (iv), (c) – (i), (d) – (ii), (e) – (iii)

‘VERY SHORT ANSWER’ OBJECTIVE TYPE QUESTIONS

1. What are final goods?

Ans. Final goods are those goods which have crossed the boundary line of production and are ready for use by their final users.

2. Define intermediate goods.

Ans. Intermediate goods are those goods which are within the boundary line production and not ready for use by their final users.

3. Define intermediate consumption.

Ans. Intermediate consumption refers to expenditure by the producers on the purchase of intermediate goods.

4. Give two examples of final goods.

Ans. (i) Pens used by students, and

(ii) Milk used by households.

5. Give two examples of intermediate goods.

Ans. (i) Paper used by a publisher in book-printing, and (ii) Milk used by a confectioner in making chocolates.

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6. What do you mean by consumption goods?

Ans. Consumption goods (also known as consumer goods) are those goods which are directly used for the satisfaction of human wants. Example: ice cream and milk used by the households.

7. Define single-use consumer goods or non-durable consumer goods.

Ans. Single-use or non-durable consumer goods are those goods which cannot be repeatedly used for purpose of consumption.

8. What are semi-durable consumer goods?

Ans. Semi-durable consumer goods are those goods which can be used for a period of one year of slightly more. These are not of very high value.

9. What is meant by producer goods?

Ans. Producer goods are those goods which are used for further production. These may be used either as raw material (like wood used in making chairs) or as fixed assets (like a tractor used in farming).

10. What is meant by capital goods?

Ans. Capital goods are those goods which are used in the process of production for several years and which are of high value. These goods are fixed assets of the producers.

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11. What is investment?

Ans. Investment is a process of increase in the stock of capital.

12. What is fixed investment?

Ans. Fixed investment refers to increase in the stock of the assets or capital goods like plant and machinery) of the producers during an accounting year

13. What do you mean by inventory investment?

Ans. Change in inventory stock during the year is called inventory investment of the producers.

14. What is gross investment?

Ans. Gross investment is the expenditure incurred by the producers on the purchase of capital goods during an accounting year it includes net investment, and 0 replacement investment for depreciation).

15. What is net investment?

Ans. Net investment in the expenditure incurred by the producers on the purchase of such capital goods which lead to increase in his capital stock.

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16. What is meant by consumption of fixed capital?

Ans. Consumption of fixed capital or depreciation refers to loss of value of fixed assets in use on account of: (i) normal wear and tear, (ii) accidental damages, and (iii) expected or foreseen obsolescence

17. Define depreciation reserve fund.

Ans. Depreciation reserve fund is a provision of funds to cope with depreciation losses. These funds are used for the replacement of fixed assets when these are worn out or when these become obsolete/ outdated

18. Define capital loss.

Ans. Capital loss is a loss of value of fixed assets while these are not in use. It occurs on account of (i) natural calamities, and (ii) fall in market value of the assets during periods of economic recession.

19. What is current replacement cost?

Ans. Current replacement cost refers to the estimated value of depreciation for all the producing units in the economy during the period of an accounting year.

20. Define stock.

Ans. Stock is that quantity of an economic variable which is measured at a particular point of time.

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21. Define flow.

Ans. Flow is that quantity of an economic variable which is measured during the period of time.

22. Give two examples of stock.

Ans. (i) Wealth, and

(ii) Quantity of money

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23. Give two examples of flow

Ans. (i) Consumption, and

(ii) Investment

24. Name the four sectors of the economy.

Ans. The four sectors of the economy are: (i) Household sector, (ii) Producer sector, (iii) Government sector, and (iv) The External (Rest of the world) sector

25. What is meant by circular flow of income?

Ans. Circular flow of income refers to unending flow of the activities of production, income generation and expenditure involving different sectors of the economy, producers and households in particular.

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26. Define real flow.

Ans. Real flow refers to the flow of factor services from the household sector to the producing sector and the corresponding flow of goods and services from the producing sector to the household sector.

27. Define money flow.

Ans. Money flow refers to the flow of money across different sectors of the economy. Because, each sector buys goods and services from the other sector.

2. Reason-based Questions (Comprehension of the Subject-matter)

Read the following statements carefully. Write True or False with a reason.

1. No value is to be added to the final goods.

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Ans. True. Because these goods have crossed the boundary line of production and are ready for use by the final users.

2. Intermediate goods are durable-use producer goods.

Ans. False. Because intermediate goods are not repeatedly used for several years by the producers and are not of high value.

3. Final goods must finally be consumed by the households.

Ans. False Final goods can finally be consumed by the households as well as by the producers.

4. Vegetables used by the households are consumption goods. Ans. True. Because, vegetables are directly used for the satisfaction of human wants.

5. Only final goods and services are to be considered in the estimation of GDP, to avoid double counting.

Ans. True Only final goods and services are to be considered to avoid double counting in the estimation of GDP. Because, final goods and services do not require further value addition. These are outside the boundary line of production.

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6. Purchase of a refrigerator by a firm for its own use is included in the estimation of national income because it leads to final consumption expenditure.

Ans. False Purchase of a refrigerator by a firm for its own use is included in the estimation of national income because it leads to final investment expenditure.

7. Capital goods involve loss of value on account of their depreciation.

Ans. True. Capital goods are productions of the producers. They depreciate in value as these are repeatedly used in the process of production.

8. The same good may be a consumption good or capital good, depending on its end-use.

Ans. True. Example : Car purchased by the household is a consumer (or consumption) good, while the car purchased by a tourist company is a capital good.

9. Clothes used by the households are durable consumer goods.

Ans. False Clothes used by the households are semi-durable consumer goods. Because (i) clothes are used for a period of one year or slightly more, and (ii) these are not of very high value.

10. Gross investment may occur even when net investment is zero.

Ans. True Gross investment – Net investment + Depreciation. Gross investment Depreciation (Replacement Investment), when net investment 0.

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11. Gross investment includes the value of expected obsolescence.

Ans. True. Gross investment = Net Investment + Depreciation. And, expected obsolescence is a part of depreciation.

12. Net investment always implies an increase in the stock of capital.

Ans. True. Net investment always implies increase in the stock of capital. Because, it does not include replacement investment.

13. Net investment induces employment.

Ans. True. Because net investment leads to increase in the stock of capital. And, more labour can be employed when the stock of capital increases.

14. Inventory investment includes change in stock of consumer goods with the producers.

Ans. True. Inventory investment includes stock of all types of goods (including consumer goods) with the producers.

15. Depreciation may occur even when fixed assets are not in use.

Ans. False. Depreciation is the loss of value of fixed assets (capital goods) in use, on account of their normal wear and tear.

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16. Expected obsolescence is a ‘capital loss’.

Ans. False Unexpected obsolescence is a “capital loss”.

17. Obsolescence is a part of depreciation.

Ans. True. But only expected obsolescence is to be considered as a part of depreciation.

18. Stocks do not change over time, while flows do.

Ans. False. Both stocks as well as flows tend to change over time.

19. Inventory investment refers to change in stock and is, therefore, a stock variable.

Ans. False. Inventory investment is a flow concept because it is related to a period of time.

20. Income is a stock concept.

Ans. False. It is a flow concept. Because it is related to a period of time.

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21. Population of a country is a flow concept.

Ans. False Population of a country is a stock concept because it is related to a point of time.

22. Flow of goods and services across different sectors of the economy is money flow.

Ans. False. Flow of goods and services across different sectors of the economy is real flow.

23. Double counting occurs when the both final and intermediate goods are included in the estimation of GDP.

Ans. True Because, GDP includes only final goods.

HOTS & APPLICATIONS

Q. How would you find out whether a particular expenditure is an expenditure on intermediate goods or on final goods?

Ans. Expenditure on final goods must lead to:

final consumption expenditure (C) or
Investment expenditure (I). The expenditure which does not lead to C and I (like the expenditure on raw material) is to be treated as an expenditure on intermediate goods. Expenditure on intermediate goods leads to intermediate consumption or intermediate cost.

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Q. Purchase of a car always means the purchase of a final good. Do you agree?

Ans. No. It depends on the end-use of the car. If it is purchased by a household, it is a final good. It is like a consumer durable.

If it is purchased by taxi-operators, then again it is a final good, as it is to be finally used by the producer as a fixed asset.

However, if the car is purchased by a retail dealer from the factory for the purpose of resale, it is to be treated as intermediate good.

Q. All producer goods are not capital goods. Why?

Ans. Producer goods include:

goods used as raw material, like wood used to make furniture, and
goods used as fixed assets, like plant and machinery Capital goods include only fixed assets of the producers. These are durable-use producer goods. On the other hand, goods used as raw material are single-use producer goods. These are not repeatedly used in the process of production. Accordingly, all producer goods are not capital goods.

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Q. How does higher rate of net capital formation lead to higher level of productivity/efficiency of labour?

Ans. Higher rate of net capital formation implies greater availability of capital (in terms of machines) per unit of labour. Aided by machines, efficiency of labour definitely increases. This precisely is the reason why labour in developed countries (like USA) is more efficient than in less developed countries like India.

Q. Distinguish between depreciation and depreciation reserve fund.

Ans. Depreciation is the loss of fixed assets in use on account of:

normal wear and tear,
accidental damages, and
expected or foreseen obsolescence.

On the other hand, depreciation reserve fund is a provision of funds to cope with depreciation losses. These funds are used for the replacement of fixed assets when these are worn-out or when these become obsolete/outdated.

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Q. What is current replacement cost?

Ans. It refers to the estimated value of depreciation for all the producing units in the economy, during the period of an accounting year.

Q. Are the following Stocks or Flows?

(i) Investment, (ii) Monetary Expenditure, (iii) A Hundred Rupee Note, (iv) A Family’s Consumption of Sugar, (v) Services of a Tutor, (vi) Production of Cement, (vii) Machinery of a Sugar Mill

Ans. (i) Investment: It is a flow concept because it is related to a period of time..

(ii) Monetary Expenditure: It is a flow concept because it is related to a period of time..

(iii) A Hundred Rupee Note: it is a stock concept because it is a component of supply of money.

(iv) A Family’s Consumption of Sugar: It is a flow concept because consumption relates to a period of time.

(v) Services of a Tutor: It is a flow concept because it is related to a period of time.

(vi) Production of Cement: it is a flow concept because it is related to a period of time.

(vii) Machinery of a Sugar Mill: It is a stock concept because it relates to a point of time.

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Q. Money flows are opposite to real flows. How?

Ans. Money flows are opposite to real flows. Because money flows are in response to the real flows. Example: There is a real flow of goods and services from the producers to the households. It is in response to it, that the households make payments to the producers. So that, money flows from the households to producers in terms of consumption expenditure. Likewise, there is a real flow of factor services from the households to the producers. It is in response to it, that the producers make payments to the households. So that, money flows from producers to the households in terms of factor payments.

Q. Giving reasons, classify the following into intermediate goods and final goods

(i) Machine purchased by a dealer,

(ii) A car purchased by a household

Ans. (i) Machine purchased by a dealer is an intermediate good because a dealer purchase a machine for further sale to its final users.

(ii) A car purchased by a household is a final good because the household is the final user of the car and no value is to be added to the car.

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Q. Classify the following goods into intermediate goods and final goods:

(i) Milk purchased by a household.

(ii) Purchase of rice by a grocery shop.

(iii) Purchase of an air conditioner for use in shop

(iv) Cloth used for making a sofa-set by the carpenter.

Ans (i) Milk purchased by a household is a final good because milk directly satisfies the wants of the household (s) or the consumer(s).

(ii) Purchase of rice by a grocery shop is an intermediate good because rice is purchased for resale to its final users

(iii) Purchase of an air conditioner for use in shop is a final good because air conditioner is an investment expenditure as it adds to the capital stock of the shopkeeper.

(iv) Cloth used for making a sofa-set by the carpenter is an intermediate good as it is used as a raw material.

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Q. State whether the following statements are true or false. Give reasons for your answer

(i) Capital formation is a flow

(ii) Bread is always a consumer good.

Ans. (i) The statement is true because capital formation is measured per unit of time period.

(ii) The statement is false. Because it depends on the end use of the bread whether it is a producer good or a consumer good it is a consumer good when used by the households. It is a producer good when used by a snacks-bar to make sandwiches.

Q. A kind of goods used as intermediary goods can never be final goods Defend or refute.

Ans. The given statement is incorrect. The same good may be a final good or an intermediate good. It all depends on the end-use of the goods. Example: Sugar is a final good when used by households. It is an intermediate good when used by candy-makers.

Q. If depreciation reserve fund is not maintained, production capacity in the economy would tend to reduce. Do you agree?

Ans. Yes, the above statement is correct. If depreciation reserve fund is not maintained, production capacity in the economy would tend to reduce. Because depreciation reserve fund facilitates replacement investment (replacement of worn-out assets).

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Q. All machines are not capital goods Justify

Ans. The end-use of the machine determines whether it is a capital good or not. Capital goods are those fixed assets of the producers which are used in the process of production for several years and which are of high value. Therefore, only those machines which are used in the process of production are considered to be capital goods Those machines which are used by the households are not capital goods Example: Computer used at home is a durable use consumer good, but a computer used in the computer coaching class is a capital good.

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Q. Lower capital formation leads to lower rate of GDP growth, Comment.

Ans. Lower capital formation implies slower rise in production capacity of the economy When production capacity rises at a slow rate, output is bound to rise at a slow rate. Slow rise in output implies a slow rise in GDP.

Q. Only net investment and not gross investment shows change in stock of capital. Defend or refute.

Ans. The statement is true Gross Investment includes expenditure on the purchase of new assets which causes change in the stock of capital and expenditure on the replacement of worn-out assets which does not cause change in stock of capital. Thus, from government, we cannot estimate net addition to the stock of capital its only indicated by net investment.

Q. Market value of your car at the time of purchase in 2018 was ₹ 5,50,000. In 2020, its market value is estimated to be Rs. 3,50,000.

What do you think is the reason for the fall in the value of the car?

(a) Normal wear and tear

(b) Accidental damages that the car might have suffered

(d) Both (a) and (b)

Ans. (d) Both normal wear and tear and the accidental damages that might have suffered, are the reasons for the fall in the value of the car

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ANALYSIS & EVALUATION

1. As a student of economics, how would you distinguish between capital goods and capital stock?

Ans. Capital goods are the durable-use producer goods and involve depreciation losses while in use. Example: Plant and machinery.

Capital stock is the stock of all man made goods which can be used a means for further production. Capital goods are only a part of capital stock. Besides Capital goods, capital stock also includes the stock of consumer goods, semi fished goods or even raw material which can be used for purpose of further production or value addition. Example: Stock of wheat with the flour mill is a part of a inventory stock, and therefore, a part of its capital stock.

2. Describe the economic value of the distinction between gross investment and net investment.

Ans. Gross investment includes (i) investment, and (ii) replacement investment. Replacement investment is funded through depreciation reserve fund. Because this investment is exactly equal to depreciation losses. Thus, replacement investment just restores the value of fixed assets (which is lost on account of their depreciation). It does not lead to any increase in capital stock for production capacity of the producers.

Net investment, on the other hand, is an investment that leads to increase in capital stock of the producers it causes increase in their production capacity.

Since net investment is related to increase in production capacity of the producers; we can say that it is net investment (not replacement investment) which is needed to accelerate the pace of growth and development.

Briefly, replacement investment helps maintain the existing level of GDP. Net investment leads to a shift in the GDP level, indicating growth and prosperity.

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3. The government asserts that MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) is to be related to asset creation. How do you evaluate this statement?

Ans. MGNREGA a social welfare scheme launched by the Government of India. It is to provide a guarantees job for 100 days to the people in the rural areas it has been observed over time that this scheme has led to huge government expenditure. But most of it has remained unproductive employment generation has not led to proportionate asset formation or capital formation (in terms of the construction of road, dams or canals) it is now being emphasised that there must be asset formation along with generation of employment. It implies that net capital formation (in the economy) must also increase along with increase in employment.

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Intermediate and Final Goods-The Difference

Intermediate Goods	Final Goods
(i) These goods remain within the boundary line of production, and are not ready for use by their final users.	(i) These goods are outside the boundary line of production, and are ready for use by their final users.
(ii) These goods may be used as raw material for the production of other goods during the accounting year.	(ii) These goods are not used as raw material for the production of other goods during the accounting year.
(iii) These goods may be resold by the firms for profit during the accounting year.	(iii) These goods are not resold by the firms for profit during the accounting year.
(iv) Value is yet to be added to these goods.	(iv) Value is not to be added to these goods.
(v) Expenditure on these goods is called intermediate consumption or intermediate cost.	(v) Expenditure on these goods is called final expenditure (=C+I)
(vi) These goods are not included in the estimation of national product or national income.	(vi) These goods are included in the estimation of national product or national income.

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Consumption Goods and Capital Goods-The Difference

Consumption Goods	Capital Goods
(i) Consumption goods lead to direct satisfaction of human wants.	(i) Capital goods do not lead to direct satisfaction of human wants.
(ii) These goods are consumed by the households when purchased.	(ii) These goods are not consumed by the households. Instead, these are used by the producers for further production.
(iii) Expenditure on consumption goods is called consumption expenditure.	(iii) Expenditure on capital goods is called investment expenditure.
(iv) Higher production of capital goods leads to higher production capacity in the economy. It is the backbone of GDP growth.	(iv) Higher production of consumption goods leads to higher level of welfare of the people. It raises their quality of life.

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Gross Investment and Net Investment-The Difference

Gross Investment	Net Investment
(i) It includes expenditure by the producers on the purchase of new assets as well as expenditure on the replacement of existing assets during an accounting year.	(i) It includes expenditure by the producers on the purchase of new assets only. More specifically, it does not include expenditure by the producers on the replacement of existing assets.
(ii) It does not include replacement investment. (= depreciation of fixed assets).	(ii) It includes replacement investment (= depreciation of fixed assets).
(iii) It shows net addition to the existing capital stock.	(iii) It does not show net addition to the existing capital stock.

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Expected Obsolescence and Unexpected Obsolescence-The Difference

Expected Obsolescence	Unexpected Obsolescence
(i) It refers to a fall in the value of fixed assets due to change in technology or change in demand.	(i) It refers to a fall in the value of fixed assets due to natural calamities or economic recession.
(ii) It is a part of depreciation.	(ii) It is not a part of depreciation. Instead, it points to capital loss.
(iii) Expected obsolescence is managed through depreciation reserve fund.	(iii) Unexpected obsolescence is managed through insurance of the fixed assets.

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Consumption of Fixed Capital and Capital Loss-The Difference

Consumption of Fixed Capital	Capital Loss
(i) It refers to loss of value of fixed assets (capital goods) while these are being continuously used in the process of production.	(i) It refers to loss of value of fixed assets while these are not in use.
(ii) It is al-oss due to (a) normal wear and tear, (b) accidental damages, and (c) expected obsolescence.	(ii) It is a loss due to (a) natural calamities (earthquake, floods, fire, etc.), and (b) fall in the market value of the assets during periods of economic recession.
(iii) It is managed through depreciation reserve fund.	(iii) It is managed through insurance of the fixed assets.

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