Capital consumption

Updated: Aug 20, 2021

Either (a) the using up of capital in the production of new goods or (b) the sale or liquidation of capital assets in order to increase current consumption. Both result in a diminishing stock of capital for an economy, firm or individual. In the former case, capital consumption corresponds to what is loosely termed depreciation – the wear and tear on machines and their resulting loss of value which occurs in the process of production. In the national income accounts capital consumption is a category of expenditure wliich is based on depreciation allowances made by firms in their accounting records and which is subtracted from gross national income or product to obtain net national income or product. Conceptually it represents an allowance for replacing capita! used up in the process of production, but in practice it will be strongly influenced by accounting conventions for estimating depreciation which do nbt accurately reflect actual capital consumption.

Reference: The Penguin Dictionary of Economics, 3rd edt.

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