What Is Investment And What Are Its Determinants?

It is the second major component of private spending is investment. Investment plays two roles in macroeconomics. First, because it is a large and volatile component of spending, sharp changes in investment can have a major impact on aggregate demand. In addition, investments lead to capital accumulation. Adding to the stock of buildings and equipment increases the nation's potential output and promotes economic growth in the long run.


Now we focus on gross private domestic investment, the domestic investment component of gross domestic product. This is however, only one component of total social investment, which includes not only investment but also intangible investments such as ones made in human capital through education and knowledge and increases in technological capital or know how through research and development.

The major types of gross private domestic investments are purchases of residential structures, investment in business fixed plant and equipment, and additions to inventory. Of the total, about one quarter is residential housing, one twentieth is normally change in inventories, and the rest averaging 70 percent of total investment is recent years is investment in business plant and equipment.