Inmacroeconomics,investment "consists of the additions to the nation's capital stock of buildings, equipment, software, and inventories during a year"[1] or, alternatively,investment spending — "spending on productive physical capital such as machinery and construction of buildings, and on changes to inventories — as part of total spending" ongoods and services per year.[2] "accounting"The types of investment include residential investment in housing that will provide a flow of housing services over an extended time, non-residentialfixed investment in things such as new machinery or factories,human capital investment in workforce education, andinventory investment (the accumulation, intentional or unintentional, of goodsinventories)Inmeasures of national income and output, "gross investment" (represented by thevariableI ) is a component ofgross domestic product (GDP), given in the formulaGDP =C +I +G +NX, whereC is consumption,G isgovernment spending, andNX isnet exports, given by the difference between the exports and imports,X −M. Thus investment is everything that remains of total expenditure after consumption, government spending, and net exports are subtracted (i.e.I = GDP −C −G −NX ).
"Net investment" deductsdepreciation from gross investment. Net fixed investment is the value of the net increase in thecapital stock per year.
Fixed investment, as expenditure over a period of time (e.g., "per year"), is notcapital but rather leads to changes in the amount of capital. The time dimension of investment makes it aflow. By contrast, capital is astock—that is, accumulated net investment up to a point in time.
Investment is often modeled as a function of interest rates, given by the relationI = I (r), with the interest rate negatively affecting investment because it is the cost of acquiring funds with which to purchase investment goods, and with income positively affecting investment because higher income signals greater opportunities to sell the goods that physical capital can produce.
In some research, investment is modeled as an increasing function ofTobin's q, which is the ratio between a physical asset'smarket value and itsreplacement value. If, for example, this ratio is greater than 1, machinery can be bought at one price and then generate output worth the larger amount that is reflected in its market value, giving positiveeconomic profit.
In some research, investment is modeled as an increasing function of the gap between the optimalcapital stock and the current capital stock. Here the optimal capital stock is modeled as that which maximizes profit.
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