In common parlance, investment means commitment of funds on acquisition of any thing that appreciates in time and generates surpluses. Purchase of old shares, a plot of land or building, used cars, etc., constitute investment for most of us provided their resale promises a little surplus at a point of time in future.
Commitment of funds on acquisition of goods likely to generate surpluses when sold by traders in future is also termed as investment by people. Likewise, acquisition and use of productive assets whether such assets are new assets or old assets is also treated as investment by most of us. Criteria for any expenditure to qualify as investment for a layman is the likelihood of a surplus generated in return at a point of time in future.
Not all of these expenditures qualify as investment in the economic sense. Let us therefore see what investment in economics really means. As regards its definition, investment refers to acquisition and use of new productive assets for producing goods or services.
Image Source: cdn2.slidemodel.com
ADVERTISEMENTS:
If we split the definition into its components, the first one is acquisition of productive assets, the second is their use for producing goods and services and the third is that the assets in question are new assets.
The fourth implicit in the definition is direct participation of the asset in the process of production. Not all expenditures mentioned above qualify as investment when tested on these four counts. The discussion may be yet simpler if we transform the definition into an elaborative one.
For instance, investment refers to acquisition and use of new machinery, equipment, etc., that participate directly in the process of production of goods and services. If new productive assets are only acquired but not used, the activity is called capital formation.
ADVERTISEMENTS:
The instant such assets are put to their use in production of goods and services, the capital formation transforms into investment. In sum, acquisition and use of new and tangible productive assets for producing goods and services is termed as investment in the economic sense.
The magnitude of investment and the factors that affect it form the core of this chapter. Its magnitude is estimated in monetary units at a point of time. This necessitates determination of its money value at prices prevailing at the time of such estimation. Likewise, factors that influence the value of investment refer to all those determinants that tend to increase or decrease it. The chapter is devoted to such discussions only.