Investment

What is Investment?

expenditure by firms on capital goods (machinery, factories, technology) to increase the economy's productive capacity, acting as a key component of Aggregate Demand

what are capital goods

physical, man-made, durable assets—such as machinery, factories, and tools—used by businesses to produce other goods and services.

Robotics, integrated plant, machine tools, infrastructure, software, equipment

what is net investment

Net investment shows the real change in productive capacity, whereas gross investment can  be misleading if depreciation is high.

what is gross investment

Total spending on new and replacement capital (before depreciation).

what is net investment

Gross investment minus depreciation (replacement of worn-out capital).

what is replacement investment

 Replacement investment maintains existing productive capacity, while new investment increases it.

what if depreciation > gross investment

If depreciation > gross investment, then net investment is negative, meaning productive capacity is shrinking.

 factors that influence business investment:

• Actual and expected demand for a good and service

• Past demand and the level of recent profits

• The cost of capital, I.e. the rate of interest on a loan or the opportunity cost of using the retained profits

• Business tax-corporation tax

• The state of business confidence/pessimism

• Access to credit Willingness of lenders to take risk