What is Investment Spending?

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.