Capital Consumption

Definition of Capital Consumption

This is the loss of capital equipment due to depreciation. Depreciation can occur due to the machines wearing out, getting lost or breaking down. Capital can also become obsolete through advances in technology.

Capital consumption can also occur due to a shift in demand. E.g. rise in demand for computers made the investment in producing typewriters obsolete.

Capital consumption needs to be deducted from GDP of a country and from the profits of a firm. This is because capital consumption reflects the amount of investment necessary to replace worn out material and as such does not indicate an increase in living standards.


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