Copyright

Investment Spending: Definition & Formula

Investment Spending: Definition & Formula
Coming up next: Outstanding Stock: Definition & Formula

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:03 Investment Spending
  • 0:50 Definition of…
  • 1:29 The Types of…
  • 2:07 Calculating Investment…
  • 3:33 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Timeline
Autoplay
Autoplay
Speed

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Brianna Whiting
In this lesson, we will explore the term investment spending. We will define it, determine the different types, learn how to calculate it, and discover why it is a necessary part of business.

Investment Spending

It is no surprise that many items we, as consumers, have come to love and want, are produced in a factory with the use of machines. We also know that those machines need to run efficiently in order to keep up with the demand. But what happens when those machines no longer work as well as they used to? What happens when those machines cannot meet the production demand necessary to keep consumers supplied? Well, for most companies, when a machine is not efficiently working, they are willing to spend money to replace it. Initially, companies will lose money because the cost of the machine has to be deducted from their profits. In the long term, however, the money spent is actually an investment that will help future production. That investment is what economists refer to as investment spending.

Definition of Investment Spending

So, what do I mean by the term investment spending? Well, investment spending is an attempt to stimulate production by means of capital goods that are either created or acquired. But what is meant by the term capital goods? In simple terms, capital goods are a company's assets, like machines or other equipment that are used, or needed, to make other goods. In our example from earlier, the machines used to produce the products we love are capital goods. Investment spending is done in hopes that the costs incurred will eventually produce long-term benefits. Companies, individuals, and even the government partake in investment spending.

The Types of Investment Spending

Investment spending comes in two forms:

1. Replacement- Obviously, machines and equipment fail or break down. When this happens, those machines need to be replaced. This type of investment spending is called capital consumption and is the product of depreciation.

2. New Purchases- In some cases, companies don't spend their money on replacing an old machine, but rather purchase additional ones. This is because more machines means greater output and productivity. In the long term, this type of investment spending helps make a company more competitive, while increasing profits.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support