Capital stock. The market value of capital goods at a given point in time, for example, at the end of a year, is referred to as the capital stock. A firm's capital stock is the market value of its factory, equipment, and other capital goods at a given point in time. A household's capital stock is the market value of its residential structures, human capital, and other capital goods at a given point in time. Firms' and households' capital stocks will vary over time due to investment and depreciation.
Investment. Investment is the addition of new capital goods to a firm's or household's capital stock. Investment is a flow measurement; it represents the market value of new capital purchased or produced per unit of time. For example, if a firm with $90,000 in capital at the end of last year purchases $10,000 in capital during the current year, its investment for this year is $10,000, while its capital stock at the end of the current year is $100,000.
Depreciation. Depreciation is also a flow measurement; it measures the reduction in market value of a firm's or household's capital stock per unit of time. Depreciation of the capital stock is caused by normal wear and tear and by the obsolescence of capital goods over time.
When depreciation over a period of time exceeds investment over the same period of time, the capital stock decreases; otherwise, the capital stock increases or remains the same. For example, if the firm with $90,000 in capital at the end of last year purchases $10,000 in new capital during the current year, but experiences $20,000 in depreciation during the current year, its capital stock at the end of the current year will have decreased to $80,000 ($90,000 + $10,000 − $20,000). If depreciation during the current year is only $5,000, instead of $20,000, then the firm's capital stock at the end of the current year will have increased to $95,000.