In macroeconomics, 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 ...

and services per year. Krugman, Paul and Robin Wells (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, lan ...

in things such as new machinery or factories, human capital investment in workforce education, and inventory investment (the accumulation, intentional or unintentional, of goods inventories) In measures of national income and output, "

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 ) is a component of

gross domestic product Gross domestic product (GDP) is a monetary 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 subjective nature this measure is of ...

(), 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 ...

, and is net exports, 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 ...

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

but rather leads to changes in the amount of capital. The time dimension of investment makes it a ''

flow Flow may refer to: Science and technology * Fluid flow, the motion of a gas or liquid * Flow (geomorphology), a type of mass wasting or slope movement in geomorphology * Flow (mathematics), a group action of the real numbers on a set * Flow (psyc ...

''. 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, which is the ratio between a physical asset's market value and its replacement value. 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 some research, investment is modeled as an increasing function of the gap between the optimal capital stock 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