Investment, in the economics literature, is largely defined as expenditure on the acquisition of new plant, machinery and equipment. Building of roads, houses, hospitals and bridges also constitute investment spending. Collectively these kinds of spending are known as capital expenditure or physical investment.
Investments such as putting money aside as a fixed deposit with banks or buying shares in a company constitute a financial investment. The latter form of investment differs from physical investment in the sense that physical investment generally improves
a country’s productive capacity or the ability to produce more goods and services into the future. Such investment leads to the enhancement of a nation’s capital stock. While financial investment is important, as it provides an indicator of the overall wealth of the nation, economists when monitoring a country’s growth prospects track the physical investment expenditure of households and business firms.
There are many desirable benefits of investment expenditure. As we increase a nation’s stock of capital, the ability of an economy to produce more goods and services also improves. For instance, a farmer investing in a tractor is likely to be more efficient in planting his/her crops. This is likely to lead to a bigger harvest in the subsequent years. Similarly, a Government investing in a road from the farm to a nearby town would assist the farmer in transporting his crops to the local market. As such, investment generally leads to higher output in the economy.