In economics, investment is the production per unit time of goods which are not consumed but are to be used for future production. Examples include tangibles (such as building a railroad or factory) and intangibles (such as a year of schooling or on-the-job training). In measures of national income and output, gross investment I is also a component of Gross domestic product (GDP), given in the formula GDP = C + I + G + NX. Investment is often modeled as a function of income and interest rates, given by the relation I = f(Y, r). An increase in income encourages higher investment, whereas a higher interest rate may discourage investment as it becomes more costly to borrow money.
The business cycle or economic cycle refers to the fluctuations of economic activity about its long term growth trend. The cycle involves shifts over time between periods of relatively rapid growth of output (recovery and prosperity), and periods of relative stagnation or decline (contraction or recession). These fluctuations are often measured using the real GDP. Despite being named cycles, these fluctuations in economic growth and decline do not follow a purely mechanical or predictable periodic pattern.
The GDP of a country is defined as the market value of all final goods and services produced within a country in a given period of time. It is also considered the sum of value added at every stage of production of all final goods and services produced within a country in a given period of time. The most common approach to measuring and understanding GDP is the expenditure method:
GDP = consumption + Investment + (government spending) + (exports − imports)
Consumption and investment in this equation are the expenditure on final goods and services. The exports minus imports part of the equation is then adjusted by subtracting the part of this expenditure not produced domestically (the imports), and adding back in domestic area (the exports).
- GDP per capita is often used as an indicator of standard of living in an economy.
- GDP is widely used by economists to follow how the economy is moving, as its variations are relatively quickly identified.