What is included in calculating Investment spending?

Expert Solution

Answer-

* Investment expenditure includes spending for new capital goods (Fixed investment) and increase in inventory holding (Inventory investment)

*Fixed investment has two major components-:
a) Business fixed investment which is spending on plant and machinery
b) Residential investment which is spending on construction of new houses and buildings.

* Like consumption, investment also inculdes spending on foreign produced goods.

* Increase in inventories are included in investment spending, in particular if firm produces good that it cannot sell, resulting it in a rise in inventories is counted as investment by the firm. For the purpose of national income accounting, firms purchased unsold goods from itself.This accounting rule is useful because it guarantees that production and expenditure will always be equal in national income accounts. By defination anything that is produced must be either purchased by a customer or purchased by firm itself.

Rahul Sunny answered 8 months ago

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