Investment is expenditure on productive capital goods. That is, goods which can be used to produce other goods and services. Thus, investment is usually held to be expenditure on factories, machinery and other physical assets. It is important to realize that economists use the word investment in a different context to the layman. An economist referring to investment does not mean the purchase of paper financial assets such as stocks or shares. Clearly, if the ownership of a company's shares is transferred from one UK citizen to another there is no overall impact on the economy.
Investment can be categorized into net investment and gross investment. Netinvestment is investment, which actually increases the nation's stock of capital goods. It is such investment that enables the economy to grow. However, some investment is necessary to replace capital stock that is worn out or obsolete. This loss of value of assets is calleddepreciation. When this replacement is added to the net investment the total achieved is termedgross investment.
You should note that investment increases the circular flow since it comprises extra spending that has not originated in. the circular flow. The main influences on the amount of investment that takes place are:
* the rate of interest since firms often have to borrow to undertake the investment
* the firm's expectation about the future behaviour of the economy. If they believe the economy will boom and the level of economic activity will increase, then they are more likely to enjoy increased sales. They may well decide to invest in new machinery or in a new factory. On the other hand, if the level of investment declines then there will be less injections than previously into the economy and the rate of growth of economic activity (or the national income) will fall. Economic statistics show us that over the last few decades the level of gross investment in the UK economy has fluctuated. This will have been one of the factors affecting the level of national income and the environment in which businesses operate.
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