Investment refers to the expenses made on the purchase of assets which yield an income to the buyer. When a person abstains from spending all his income on consumer goods, and with the savings so accumulated buys shares or debentures of some company which yield him dividend or interest income, he is said to have made an investment. However, from a strict economy point of view, an investment is said to have been made only when it results in a net addition to the community’s stock of capital goods. Buying of shares and debentures, which have existing physical assets lying behind them, would represent only a change in the ownership of these assets. Such transitions neither add to the community’s stock of capital goods, nor do they create any addition income and employment. Hence, such investment is regarded as a purely financial transfer and is, therefore, referred to as 'Financial Investment' or the 'purchase of Securities'.
On the other hand, when expenditure is made on the purchase of new capital goods – plant, equipment and machinery- it does make an addition to the nation's stock of capital. Buying of these new capital goods also provides additional employment to the people who engaged in producing it and thus adds to the total income in the economy. We are interested here only in this type of investment which adds to the stock of real capital goods. Such investment expenditure which is made on the purchase of new factories, new plants and new machines in the 'real investment', as distinct from the 'financial Investment' made on the purchase of securities which only represents the ownership transfer of the existing capital assets. Investment, as discussed here in the theory of income determination, would always refer to the real investment, which can be defined as expenditure made on the purchase of new capital goods.SUBMIT ASSIGNMENT NOW!