Questions and Answers
What is referred to as the purchase of new capital used to produce goods and services?
Real investment
Which type of investment leads to an increase in production, employment, and income?
Real investment
What does financial investment involve?
Buying of existing shares and bonds
What is the relation between gross investment and depreciation in net investment?
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What does it imply if depreciation exceeds gross investment?
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Which of the following statements is correct?
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Study Notes
Investment in Economics
- Investment refers to the purchase of new capital goods used to produce goods and services, increasing the physical stock of capital.
- Real investment involves the addition of new capital, leading to increased production, employment, income, and buying of capital goods.
Types of Investment
- Financial investment involves buying existing shares and bonds, which is a form of savings and a change of ownership of assets, not creating new capital assets.
- Financial investment is distinct from real investment, which involves the creation of new capital goods.
Investment vs. Depreciation
- Investment increases the stock of capital, while depreciation reduces it.
- Gross investment is the total amount spent on acquiring new capital goods.
Net Investment
- Net investment is the difference between gross investment and depreciation (net investment = gross investment - depreciation).
- A negative net investment implies that the economy's stock of capital is shrinking, as depreciation exceeds gross investment.
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Description
Understand the different types of investments, including real investment and financial investment, and their impact on the economy.
