Investment is a variety of activities which involves adequate commitment of resources into assets that are supposed to grow such resources for profit or income purposes. Simply put, it is the purchase or buying of assets that will not be used today but can be used to create wealth in future. There are basically two types of investments which are physical investments (buildings, estates, goods, land etc) and intangible investments (bonds, shares/stocks, loans etc).
Investment spending has to do with money spent on capital goods used in the production of other goods, capital or services. Investment spending may include buying of machinery, inputs, infrastructure, land etc. In Other Words, investment spending is a way of increasing output by means of creating or purchasing of capital goods.
Total investment spending is the summation of all expenses made to be able to maximize production of goods and services as well as profit. There are two main types of investment spending:
Replacement has to do with the changing of equipment or machines which has depreciated from excessive use due to wear and tear or has broken down. This type of investment spending is classified under capital consumption and is the product of depreciation.
New purchases are the result of business owners preferring to purchase more number of machines rather than replacing old ones. This is because the greater the number of machines, the greater the level of productivity and output. This type of investment spending helps a company grow by increasing profits.
CALCULATING INVESTMENT SPENDING
To be able to calculate investment spending, some certain terms are used. Terms like gross investment, depreciation and net investment. Gross investment has to do with the combination of replacement and new purchases. It is the amount invested by a company in business assets which does not account for any depreciation. Depreciation on its own is the decrease in value of machines or equipment as time progresses because of excessive use. Net investment is the actual addition made to the capital goods in a given period which is gotten by subtracting depreciation from gross investment. For example
If a bakery replaces five worn out ovens with identical ovens and purchases two or more ovens in order to be able to bake more snacks, the gross investment will be 7, replacement investment 5 and net investment 2.
To calculate investment spending in macro economics the GDP formula is used which states that total output/GDP (Y) is equal to Consumption (C) + Investment (I) + Government Spending (G) + Net exports (NX).
Y = C + I + G + NX
Where net exports is exports(X) minus imports (M): NX = X – M.
In a closed economy, the formula will be without the net export:
Y = C + I + G.
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