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What is Investment Spending?

By Kevin P. Hanson
Updated May 16, 2024
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Investment spending generally relates to the creation and acquisition of capital goods with the intent of using them to try to stimulate economic production. Capital goods are products that are needed to create other goods. These items can include equipment, machinery, buildings, and roads. Individuals, businesses, and governments try to use investment spending to make certain types of expenditures work in their favor by producing long-term benefits.

A government might want to use this type of spending in an attempt to raise the effectiveness of inner agency procedures. It can be employed to help move the nation's general capital reserves forward in an effort to stimulate aggregate growth in the economy. These methods and techniques may be used in several productive ways, not only to help a central government itself, but also to provide aid to other government bodies. For example, the US government might elect to take some of its funds and invest them directly in selected state and local government managed projects, again to try and fuel economic growth. Additional uses for governmental investment spending consist of acquiring of material capital for potential long-term gain, education and training programs, and research and development projects, which tend to yield results in the future.

Many economists consider investment spending to be a vital part of the collective demand in a government's economy and a primary indicator of the status of its economic development. There is a downside to this type of spending, however. It is commonly looked upon as the most unstable factor involved in estimating aggregate demand. The amount of investment spending traditionally is defined by the anticipated rate of return, which relies heavily on the current interest rate and the projected condition of the economy. This generally means that the overall mood of business at the time can have a considerable impact the investment amounts and pace of economic growth.

When considering all of the factors that define what investment spending is, the act of investing is often comparable to the act of consumption. Both actions are crucial pieces of the cumulative demand in an economy. Investment spending at its most basic level is usually born with an individual's or organization's resolution to put off consumption and instead to look for opportunities to build up capital. This decision often leads to an increase in the productive possibilities of an economy.

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Discussion Comments
By sunshine31 — On Oct 30, 2010

SurfNturf-The marginal propensity to save is said to be 35% of every dollar. For every dollar is earned, 35 cents will be saved.

This is the average savings, but not everyone uses this percentage for saving. Planned spending is what you intend to spend your income on. These expenditures are usually fixed on-going expenses such as a mortgage and auto note.

A family can allocate additional planned spending in terms of charitable giving. These funds can be annualized and added to a families’ overall budget. This types of money investments enhance the quality of life in the neighborhood.

By surfNturf — On Oct 30, 2010

The immediate determinants of investment spending are the yields and rate of return.

The investment interest rate determines the level of planned spending as a market investment. Investment income is achieved when the yield or investment interest rate offers enough of a return to offset any taxes associated with the investment.

Often investment during recession involves safer investments like blue chip stocks, Treasury bill, and government bonds. The investment during inflation will require higher yielding investments.

Often bond prices are diametrically opposed to interest rates, so when interest rates go up and it becomes more expensive to borrow money, the price of bonds go down making them cheaper to purchase.

In this situation more people will make a market investment in bonds because their long term yields will be higher.

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