Capital consumption allowance is the part of new capital produced during one year, which is needed to replace the capital used up during that year. It is also known as depreciation. Capital consumption allowance (CCA) is equal to the difference between gross investment (Ig) and net investment (In):
CCA = Ig - In.
All machines and equipment used to produce other goods, are subject to some wear and tear. Part of capital goods production must be devoted to replace this wear and tear. Otherwise, the productive capacity of a nation would be depleted. This replacement of the capital used is capital consumption allowance.