Theory of Capital and Investment, Macroeconomics Assignment Help

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Capital & Investment

Concept of Capital

By capital we typically mean manufactured goods that are used to produce other goods and services but are not used up in the production process (such as machines and computers). Sometimes we use the term fixed capital instead of capital to distinguish capital from financial capital, which consists of bank deposits, stocks, bonds and other assets. Fixed capital is sometimes divided into physical capital and immaterial capital such as individual capital (talent, skills, and knowledge) and social capital.

Concept of Investment

When we use the word investment, we typically mean "gross investment". Basically, gross investment consists of all finished goods that we have produced but not consumed. The important parts of gross investment are gross fixed investment and changes in inventories. Gross fixed investment is the total amount of investment in fixed capital. If a firm produces more than it sells in a particular period of time, its inventory will increase. This will be counted as a positive investment. In the same way, we will have a negative inventory investment whenever inventories decrease. By net investments we mean gross investments minus depreciation such that the actual increase in the amount of capital between two periods in time is equal to the net investment during this period. Keep in mind that while capital is a stock, investment is a flow. We may talk about a firm's total amount of capital at a particular point in time and a firm's total investment over a period of time.

Concept of Capital and Investment

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