Saving refers to that portion of income which is not spent on consumption. In other words, a part of the income, and generally quite a large part, is used for buying consumer goods and service and thus forms the consumption expenditure. The other part, which is not for purchase of consumption goods forms the savings. Thus, saving can be defined as the difference between the income and consumption expenditure.
Investment refers to the expenditure on the purchase of capital goods, plant, equipment, machinery, etc. Any expenditure that adds to the real stock of capital is termed as investment.
An important fact about saving and investment is that they are done generally by different economic groups and for different economic reasons. While savings are generally done by the households, investment activity is performed mainly by business enterprises. Again, while motivation behind saving may be to provide for the old age, to meet some unforeseen expenses in future or to merely enjoy the satisfaction that accumulated wealth might give, investment is primarily motivated by the desire to earn profits that the investment opportunities throw open. While the savings depend upon the level of income, investment largely depends on factors such as technical progress, population growth, rate of interest, government policy, etc.
Now, whereas saving depend directly upon income, investment depends upon it indirectly. An increase in income would also increase investment, but indirectly. Increased income would lead to more consumption which would necessitate more investment to produce the greater amount of goods and services. Investment is also affected independently by certain factors like technological progress, growth of population, etc. In fact, investment is an unstable factor and it is this instability of investment which causes fluctuations in the business activity.
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