Investment

Economics Definition of Investment

Investment is value-adding activity which draws down on resources in the present to enlarge the productive capabilities of the economy Opens in new window in the future.

Investment is the spending by firms on new factories, office buildings, machinery and inventories, plus spending by households on new houses.

Notice that the definition of investment depicted here is narrower than in everyday use.

The word investment when used in economics Opens in new window must never be confused with investment in the share market or any other kind of financial investment of money to earn more money.

For example, people often say they are investing in the share market or in a rare coins. As we have seen, economists reserve the word investment for purchases of machinery, factories and houses.

Investment in economics is a form of production.
Most economic activity is the use of resources to produce goods and services for final use by consumers.

Economists don’t include purchases of shares or rare coins or deposits in savings accounts in the definition of investment because these activities don’t result in the production of new goods.

For example, a Telstra share represents part ownership of that company. When you buy Telstra shares nothing new is produced—there is just a transfer in ownership. Similarly, buying a rare coin or putting $1000 in savings account does not result in an increase in production.

GDP is not affected by any of these activities, so they are not included in the economic definition of investment.

Investment is the use of resources to build an economy’s productive strength.

Consumption Opens in new window and investment are thus alternative uses of a nation’s resources. In both cases the resource base is drawn down.

  • With consumption the resources are gone and nothing has replaced them.
  • With investment, in place of the resources that were used are various forms of capital allowing the economy to produce more than it had before.