Investment is an important tool of the theory of income and employment. In common parlance, investment means purchases of shares, bonds and securities, saving deposits with banks and other non-banking financial intermediaries. But, this is transfer of ownership of ‘paper title’ or ‘financial investment’. It does not add to the stocks of physical assets.
In Keynesian terminology, investment refers to the acquisition and increase in the real assets. Investment expenditure in real assets may include the following:
(i) Purchase pr production of new machinery, plant, equipment, etc.
(ii) Creation of new physical assets such as roads, airports, dams, canals, power generation plants, trucks, railway tracks and engines, etc.
(iii) Inventory building, i.e., stocks of raw materials, semi-finished goods, unsold final goods, etc.
By investment is meant an addition to capital, such as occurs when a new house is built or a new factory is built. Investment means making an addition to the stocks of goods in existence.
In brief, investment in macroeconomic analysis refers to that part of the aggregate output for any given time period which takes the form of new structures, new capital equipment and changes in the business inventories. Investment function, thus, explains the relationship between investment and its determinants.
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