2b. Investment

Investment

The word investment is used in a very precise way. Investment is the addition to capital stocks such as factories, machines, offices and stocks of materials used to produce other goods and services.

Investment and saving can mean the same thing in other areas but in economics they are opposite. Investing in shares would be an example of saving for example

Gross vs Net investment

The value of capital stock depreciates over time as it wears out and is used up. This is called depreciation or capital consumption.

Gross investment measures investment before depreciation, whilst net investment is gross investment minus the value of depreciation.

Human capital and physical capital

Investment in human capital is the investment in education or the training of workers.

Physical investment is an investment in factories etc. and is the true component of aggregate demand

Investment is made both by the public sector and private sector. Public sector investment is constrained by complex political considerations.

Factors that impact investment

The accelerator theory

• Investment is likely to rise with economic growth

• I rises proportionately more than C

  Interest rates

• Comparing the rate of interest to the potential returns on investment

  Access to credit

• If investment is financed through borrowing, a firm needs to be able to access this money

  Government and regulations

• Corporation tax is a tax on profits that could be used by a firm for investment