Labor Income - Includes all wages, salaries, and benefits paid to labor. Capital Income - Includes all income of owners of land and capital, and profits of entrepreneurs. Depreciation - Depreciation is the wearing out of machines and equipments. The expenses made by firms to replaces depreciated capital are included in this category. Note - Depreciation is used to distinguish between Gross and Net Investments .
Gross investment includes all machines and equipments produced.
To measure the change in the economy's stock of capital it is important to exclude depreciation from gross investment. Example - Suppose an economy started with 100 machines in 1994 and 50 new machines were bought in the beginning of 1995. But it does not imply that the economy's stock of capital is 150 in 1995 because it is possible that some of the 100 machines that the economy started with in 1994 depreciated in 1994 and had to be replaced in 1995. Actually, the stock of machines is lower in 1995 than in 1994. A true representation of the change in the economy's stock of capital is given by net investment.