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What Is the Role of Investment in Macroeconomics?

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  • Written By: Osmand Vitez
  • Edited By: PJP Schroeder
  • Last Modified Date: 20 November 2016
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Macroeconomics takes a broad look at the overarching factors that affect an economy. One of the biggest economic indicators under scrutiny in macroeconomics is gross domestic product, which includes three pieces: consumer spending, investment, and government spending. Investment in macroeconomics can have two parts: business investment and government investment. Business investment includes money spent on machinery, buildings, inventory, and technology. Government investment tends to focus more on infrastructure, such as roads, bridges, industry improvements, and other large-scale projects.

Business investment in macroeconomics typically has a bigger role in a free market economy. Economists often look at this part of gross domestic product to determine the mood of businesses within a nation. Another use for this economic indicator is to determine the stage of the business cycle for the economy. Copious capital spent on business investment can indicate future growth or planned expansion by companies. Stable business investment indicates a cycle peak, while lower business investment can signal economic contraction.

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Government investment in macroeconomics is a bit less important in a free market economy when compared to business investment. Even in free market economies, some government spending and investment is necessary to sustain public agencies. Economists can use government spending, however, to assess whether or not a government is attempting to stabilize an economy. Keynesian economics, for example, is an economic theory that states a government should purchase excess supply when consumers or businesses fail to do so. Higher government investment coupled with lower business investment, therefore, may signal a change in macroeconomic policy.

An economy cannot expand in terms of business output without the review of investment in macroeconomics. Outside sources can also lead to increases in business investment, which results in higher economic growth. Free markets that are running smoothly often draw other countries into the economy as foreign businesses look to capitalize on external business cycles. Investment in macroeconomics can help economists discover what portion comes from domestic businesses and what portion does not. Direct business investment from foreign companies is often of interest in these measures.

When studying gross domestic product, business investment may not be prevalent in all economic quarters. For example, business investment may peak during the later months in the year as companies ramp up for holiday spending from consumers. The fourth quarter may also be high on business investment as companies begin production for the upcoming year. Investment in macroeconomics often attempts to define the growth and movements by quarter in order to explain movements in the larger economy.

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