macroeconomics Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, and ...

, investment "consists of the additions to the nation's capital stock of buildings, equipment, software, and inventories during a year" or, alternatively, investment spending — "spending on productive physical capital such as machinery and construction of buildings, and on changes to inventories — as part of total spending" on

goods In economics, goods are items that satisfy human wants and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not tran ...

and services per year. Krugman, Paul and

Robin Wells Robin Elizabeth Wells (born 1959) is an American economist. She is the co-author of several economics texts, mostly with her husband Paul Krugman. Life and career Wells received her BA from the University of Chicago and her PhD from the Universit ...

(2012), 2nd ed. ''Economics'', p. 593. Worth Publishers. The types of investment include residential investment in housing that will provide a flow of housing services over an extended time, non-residential

fixed investment Fixed investment in economics is the purchasing of newly produced fixed capital. It is measured as a flow variable – that is, as an amount per unit of time. Thus, fixed investment is the accumulation of physical assets such as machinery, land ...

in things such as new machinery or factories,

human capital Human capital is a concept used by social scientists to designate personal attributes considered useful in the production process. It encompasses employee knowledge, skills, know-how, good health, and education. Human capital has a substantial ...

investment in workforce education, and

inventory investment Inventory investment is a component of gross domestic product (GDP). What is produced in a certain country is naturally also sold eventually, but some of the goods produced in a given year may be sold in a later year rather than in the year they wer ...

(the accumulation, intentional or unintentional, of goods

inventories Inventory (American English) or stock (British English) refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation. Inventory management is a discipline primarily about specifying the shap ...

) In

measures of national income and output A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product (GDP), gross national product (GNP), net national income (NNI), and adjusted nati ...

, "

gross investment Gross private domestic investment is the measure of physical investment used in computing GDP in the measurement of nations' economic activity. This is an important component of GDP because it provides an indicator of the future productive capacit ...

" (represented by the

variable Variable may refer to: * Variable (computer science), a symbolic name associated with a value and whose associated value may be changed * Variable (mathematics), a symbol that represents a quantity in a mathematical expression, as used in many ...

) is a component of

gross domestic product Gross domestic product (GDP) is a money, monetary Measurement in economics, measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjec ...

(), given in the formula , where is consumption, is

government spending Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting, the acquisition by governments of goods and services for current use, to directly satisfy the individual o ...

, and is

net exports The balance of trade, commercial balance, or net exports (sometimes symbolized as NX), is the difference between the monetary value of a nation's exports and imports over a certain time period. Sometimes a distinction is made between a balance ...

, given by the difference between the exports and imports, . Thus investment is everything that remains of total expenditure after consumption, government spending, and net exports are subtracted (i.e. ). "Net investment" deducts

depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the a ...

from gross investment. Net fixed investment is the value of the net increase in the

capital stock A corporation's share capital, commonly referred to as capital stock in the United States, is the portion of a corporation's equity that has been derived by the issue of shares in the corporation to a shareholder, usually for cash. "Share capi ...

per year. Fixed investment, as expenditure over a period of time (e.g., "per year"), is not

capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the durable produced goods used f ...

but rather leads to changes in the amount of capital. The time dimension of investment makes it a '' flow''. By contrast, capital is a ''stock''—that is, accumulated net investment up to a point in time.

Determinants

Investment is often modeled as a function of income and interest rates, given by the relation , with the interest rate negatively affecting investment because it is the cost of acquiring funds with which to purchase investment goods, and with income positively affecting investment because higher income signals greater opportunities to sell the goods that physical capital can produce. In some research, investment is modeled as an increasing function of

Tobin's q Tobin's q (or the q ratio, and Kaldor's v), is the ratio between a Asset, physical asset's market value and its replacement value. It was first introduced by Nicholas Kaldor in 1966 in his paper: ''Marginal Productivity and the Macro-Economic Theo ...

, which is the ratio between a physical asset's

market value Market value or OMV (Open Market Valuation) is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with ''open market value'', ''fair value'' or ''fair market value'', although the ...

and its

replacement value The term replacement cost or replacement value refers to the amount that an entity would have to pay to replace an asset at the present time, according to its current worth. In the insurance industry, "replacement cost" or "replacement cost valu ...

. If, for example, this ratio is greater than 1, machinery can be bought at one price and then generate output worth the larger amount that is reflected in its market value, giving positive

economic profit In economics, profit is the difference between the revenue that an economic entity has received from its outputs and the total cost of its inputs. It is equal to total revenue minus total cost, including both explicit and implicit costs. It i ...

. In some research, investment is modeled as an increasing function of the gap between the optimal

and the current capital stock. Here the optimal capital stock is modeled as that which maximizes profit.

References

{{Economics Macroeconomic aggregates

Determinants

See also

References