What does the change in capital stock formula represent?

The change in capital stock formula is represented by the relationship between investment and depreciation. This formula illustrates how changes in the capital stock of an economy occur as a result of net investment—investment in new capital minus the loss of capital due to depreciation.

When firms invest in new capital goods, they are adding to the total stock of capital. However, over time, existing capital can lose value because of wear and tear, obsolescence, or other forms of depreciation. Therefore, to determine the net change in capital stock, one must subtract the depreciation from the total investment made in the economy during a specific period.

This relationship captures the essence of how an economy's productive capacity evolves, reflecting both the creation of new capital and the loss of old capital. It shows that a positive change in capital stock occurs when investment exceeds depreciation, indicating growth in the productive capacity of the economy. Conversely, if depreciation surpasses investment, the capital stock would decrease, suggesting a decline in the economy's ability to produce goods and services.