Questions and Answers
What is the definition of real investment?
The purchase of new capital to produce goods and services
What distinguishes financial investment from real investment?
It involves the change of ownership of existing assets
How is net investment calculated?
Gross investment - depreciation
What happens when depreciation exceeds gross investment?
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Which of the following is a correct statement about investment?
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What does gross investment refer to?
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Study Notes
Investment in Economics
- Investment refers to the purchase of new capital used to produce goods and services, resulting in an increase in the physical stock of capital.
Types of Investment
- Real investment: involves the addition of new capital, leading to an increase in production, employment, income, and buying of capital goods.
- Financial investment: involves the buying of existing shares and bonds, which is a form of savings and only a change of ownership of assets, not the creation of new capital assets.
Investment and Capital Stock
- Investment increases the stock of capital, unlike depreciation which decreases it.
Measures of Investment
- Gross investment: the total amount incurred on the acquisition of new capital goods.
- Net investment: the difference between gross investment and depreciation (net investment = gross investment - depreciation).
Impact of Investment on Economy
- If depreciation exceeds gross investment, the economy's stock of capital is shrinking.
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Description
Understanding investment in economics, including real investment and financial investment, and their effects on production, employment, and income.
