Investment spending is an important concept in macroeconomics and finance. It refers to expenditure made by companies and firms on capital goods and equipment, with the aim of increasing productivity and future output. This type of spending is a key driver of economic growth. The introduction sets the background and explains investment spending will be further elaborated on.
Components of investment spending
Investment spending includes business expenditures on machinery, equipment, factories, etc. It also includes residential investment such as new housing construction. Government investment in infrastructure like roads and schools is also a component.
Impact on GDP
Investment spending directly contributes to a nation’s gross domestic product (GDP). More investment leads to more capital goods installed in the economy, increasing productive capacity.
Determinants
The level of investment spending depends on factors like interest rates, expectations of future market conditions, tax incentives for investment, etc.
Relationship with saving
In macroeconomic theory, investment spending is related to saving. Savings provide a source of lending that enables borrowing for investment purposes.
In summary, the term investment spending refers to expenditures by businesses and households that increase the economy’s productive capacity for the future. It is a major GDP component and essential for economic expansion.