Capital consumption

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Querist : Anonymous

Querist : Anonymous (Querist)

29 April 2013 Can any one explain me in precise ,what is meant by capital consumption

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)
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15 July 2013 you are asking about captive consumption or capital consumption?

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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18 July 2024 Capital consumption refers to the reduction in the value or utility of capital goods over time due to wear and tear, obsolescence, or depreciation. In economic terms, it represents the process by which physical capital (such as machinery, equipment, buildings) loses value or becomes less effective in producing goods and services.

Here are the key points to understand about capital consumption:

1. **Depreciation**: Capital goods typically lose value over time due to physical deterioration (wear and tear). This reduction in value is recorded as depreciation in accounting and economic terms.

2. **Obsolescence**: Advances in technology and changes in market preferences can render existing capital goods obsolete. When this happens, the value of the capital goods declines because they may no longer be as productive or competitive.

3. **Useful Life**: Each capital asset has a useful life, which is the period over which it is expected to be used to generate income. As the asset ages or becomes obsolete, its ability to contribute to production diminishes, leading to capital consumption.

4. **Impact on Production**: Capital consumption affects the overall productivity of an economy or a business. As capital goods decline in value or utility, they may require replacement or refurbishment to maintain or enhance production capacity.

5. **Measurement**: Economists and accountants measure capital consumption to assess the ongoing investment needed to maintain and replace capital assets. It is an important factor in calculating net domestic product (NDP) and net national product (NNP) as it adjusts gross domestic product (GDP) to account for capital depreciation.

In summary, capital consumption reflects the gradual reduction in the value and effectiveness of capital goods over time, impacting economic productivity and necessitating ongoing investment in new capital to sustain and grow economic output.

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