Investment (macroeconomics)
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macroeconomics Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. Macroeconomists study topics such as output (econ ...
, 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 anything that is good, usually in the sense that it provides welfare or utility to someone. Alan V. Deardorff, 2006. ''Terms Of Trade: Glossary of International Economics'', World Scientific. Online version: Deardorffs ...
and services per year. Krugman, Paul and Robin Wells (2012), 2nd ed. ''Economics'', p. 593. Worth Publishers. "
accounting Accounting, also known as accountancy, is the process of recording and processing information about economic entity, economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activit ...
" 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 in things such as new machinery or factories,
human capital Human capital or human assets is a concept used by economists 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 subs ...
investment in workforce education, and inventory investment (the accumulation, intentional or unintentional, of goods
inventories Inventory (British English) or stock (American English) is a quantity of 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 ...
) 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 income (GNI), net national income (NNI), and adjusted nati ...
, " gross investment" (represented by the variable ) is a component of
gross domestic product Gross domestic product (GDP) is a monetary measure of the total market value of all the final goods and services produced and rendered in a specific time period by a country or countries. GDP is often used to measure the economic performanc ...
(), 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 or ...
, 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 refers to two aspects of the same concept: first, an actual reduction in the fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wears, and second, the allocation i ...
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.


Determinants

Investment is often modeled as a function of 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 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 t ...
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.


See also

* Inventory investment


References

{{Economics Macroeconomic aggregates