Investment Definition: Investment is the addition to the capital stock of the economy.

It refers to the spending by firms on capital goods such as factories, offices, machinery and stock of raw materials. Investment in physical capital is investment in factories etc. Investment in human capital is the investment in the education and training of workers. Investment spending is an injection into the circular flow of income. Investment is vital to promoting long run economic growth.

Firms invest for two primary reasons: 1. To replace worn out, or failing machinery, equipment (Capital consumption) which arises from the continuous depreciation of fixed capital assets. 2. To increase productive capacity. This will reduce longterm costs, increase competitiveness, and raise profits. AD & AS analysis Higher Investments shifts the AD rightward in the short run due to an increase in the spending on capital goods thus increasing real output and price level. Higher investments will improve productivity and increase the countrys productive capacity also unit costs will fall(economies of scale). Therefore AS curve will also shift rightward in the long run In the long run, the shifts in terms of price might cancel each other out , but reinforce each other in terms of output

Net Investment Net Investment = Gross Investment - Depreciation

o However it will only occur if existing capital goods are not sufficient to produce the extra output