There are many ways you could spend or invest your money, and you may be confused with the plethora of seemingly great options out there. Well today, we would like to introduce you to something called investment spending.
To ensure you can make the best decision based on your financial situation, first we should understand the exact definition of investment spending. Investment spending is defined as spending your money to acquire capital goods to, which in turn could provide financial benefits. Examples of capital goods include land, equipment, or machinery you can use to create and produce new products. Examples include purchasing a plot of land to grow crops or building a hospital and buying medical equipment.
When someone decides to get into investment spending, they usually participate with the hopes of gaining financial benefits in return for their initial expenses, as well as benefitting society as a whole down the line. A distinction also needs to be made between investment spending and investment, as they are not the same thing. While investment spending refers to the purchasing of capital goods, investment is defined as the acquisition of monetary instruments such as stocks, bonds, and derivatives.
There are two types of investment spending: new purchases and replacement. An example of new purchase investment spending is a factory manager purchasing a brand-new machine to reduce production time and improve product quality. On the flip side, an example of replacement investment spending is that same factory manager replacing parts and components of an old machine to help improve its productivity.
So, what exactly is the first step you need to take? If you really are interested in investment spending, one of the best ways to start is to consult with a financial advisor. A financial advisor can help you review your finances and make suggestions based on your short and or long-term goals.
Investment spending is also an important component of a country’s economy. When calculating a country’s Gross Domestic Product (GDP), investment spending is one of the few factors taken into account. The formula is GDP= Consumption + Investment (private sector investment spending) + Government Investment Spending + Net Exports. When a country’s investment spending is high, its GDP will also be high. This is because high private investment spending levels indicate greater disposable income and a positive outlook on the economy looking forward, while high government investment spending means that the country is ready for further economic growth.
To give an example of how investment spending affects GDP or Gross Domestic Product calculations, let’s say that a country’s consumption is 20000, their net export is 5000, government spending is 10000, and investment spending is 12000. If we use the GDP formula and add up all these components, the GDP will total at 47 000. However, if investment spending increases to 150000 as companies ramp up production, the GDP will rise to 50 000. This is why investment spending by both the private and public sectors are very important to a country’s economy.