Investment (macroeconomics)

In macroeconomics, investment is the amount purchased per unit time of goods which are not consumed at the present time. Types of investment include residential investment in housing that will provide a flow of housing services over an extended time, non-residential fixed investment 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" (represented by the variable $I$ ) is a component of gross domestic product ( $GDP$ ), given in the formula $GDP = C + I + G + NX$ , where $C$ is consumption, $G$ is government spending, and $NX$ is net exports, given by the difference between the exports and imports, $X - M$ . Thus investment is everything that remains of total expenditure after consumption, government spending, and net exports are subtracted (i.e. $I = GDP - C - G - NX$ ).

"Net investment" deducts depreciation 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 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.

Investment is often modeled as a function of income and interest rates, given by the relation $I = f (Y, r)$ . An increase in income encourages higher investment, whereas a higher interest rate may discourage investment as it becomes more costly to borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents an opportunity cost of investing those funds rather than lending out that amount of money for interest.^[1]

References

^ Hassett, Kevin A. (2008). "Investment". In David R. Henderson (ed.) (ed.). Concise Encyclopedia of Economics (2nd ed.). Indianapolis: Library of Economics and Liberty. ISBN 978-0865976658. OCLC 237794267. {{cite encyclopedia}}: |editor= has generic name (help)

[1] Hassett, Kevin A. (2008). "Investment". In David R. Henderson (ed.) (ed.). Concise Encyclopedia of Economics (2nd ed.). Indianapolis: Library of Economics and Liberty. ISBN 978-0865976658. OCLC 237794267. {{cite encyclopedia}}: |editor= has generic name (help)

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References