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Updated on Jun 14, 2024
Reading time 4 minutes

Fixed investment

Fixed investment refers to the purchase of long-term physical assets such as buildings, machinery, equipment, and infrastructure by businesses, governments, or households.
Written by
Reviewed by
Updated on Jun 14, 2024
Reading time 4 minutes

3 key takeaways

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  • Fixed investment involves expenditures on physical assets that are used for production and have a useful life extending beyond a year.
  • It is a crucial component of Gross Domestic Product (GDP) and reflects a country’s economic health and growth potential.
  • Fixed investment can be influenced by factors such as interest rates, business confidence, government policies, and economic conditions.

What is fixed investment?

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Fixed investment, also known as capital formation, includes spending on tangible assets that are used in the production of goods and services. These assets typically have a long lifespan and are not consumed in the short term. Fixed investment is a key indicator of economic activity, as it reflects the level of confidence and expectations about future economic conditions.

Components of fixed investment

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Non-residential investment: This includes spending on commercial buildings, industrial facilities, machinery, equipment, and technology. Businesses invest in these assets to increase their productive capacity and efficiency.

Residential investment: This encompasses expenditures on new housing units, residential buildings, and improvements to existing housing. It reflects the housing sector’s contribution to economic growth.

Public investment: Government spending on infrastructure projects such as roads, bridges, schools, hospitals, and public utilities falls under this category. Public investment aims to enhance the overall infrastructure and support economic development.

Importance of fixed investment

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Economic growth: Fixed investment is vital for economic growth as it enhances the productive capacity of an economy. Investments in machinery, equipment, and infrastructure lead to increased production, efficiency, and innovation.

Job creation: Fixed investments often lead to job creation in various sectors such as construction, manufacturing, and services. The development of new facilities and infrastructure projects requires labor, boosting employment.

Productivity improvements: Investing in modern machinery and technology can improve productivity by enabling more efficient production processes and reducing costs. Higher productivity contributes to economic competitiveness and growth.

Future economic prospects: High levels of fixed investment indicate positive business sentiment and confidence in future economic prospects. It suggests that businesses and governments are optimistic about future demand and growth opportunities.

Factors influencing fixed investment

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Interest rates: Lower interest rates reduce the cost of borrowing, making it more attractive for businesses and governments to invest in fixed assets. Conversely, higher interest rates can discourage investment.

Business confidence: When businesses are confident about future economic conditions, they are more likely to invest in expanding their productive capacity. Uncertainty or pessimism can lead to reduced investment.

Government policies: Fiscal policies, such as tax incentives, subsidies, and public investment programs, can encourage fixed investment. Regulatory environment and ease of doing business also play a role in investment decisions.

Economic conditions: Economic stability and growth prospects influence fixed investment. A stable macroeconomic environment with predictable inflation and exchange rates is conducive to investment.

Examples of fixed investment

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Manufacturing plant: A company investing in a new manufacturing plant to increase production capacity and meet growing demand.

Infrastructure projects: Government spending on building highways, bridges, and public transportation systems to improve connectivity and support economic activities.

Commercial real estate: A business constructing a new office building or retail space to expand its operations and accommodate more employees or customers.

Residential construction: Investment in building new homes, apartment complexes, or renovating existing residential properties.

Measuring fixed investment

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Fixed investment is measured as a component of Gross Domestic Product (GDP) and is reported in national accounts. It includes both private and public sector investments and is typically divided into categories such as residential, non-residential, and public investment.

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To further understand the concept and implications of fixed investment, consider exploring these related topics:

  • Gross Domestic Product (GDP): The total value of goods and services produced in a country, including fixed investment as a key component.
  • Capital Formation: The process of building up the stock of physical capital in an economy through investment in fixed assets.
  • Economic Indicators: Measures used to assess the health and performance of an economy, including investment levels, employment rates, and productivity.
  • Business Cycles: The fluctuations in economic activity over time, influenced by factors such as fixed investment, consumer spending, and government policies.

Fixed investment plays a crucial role in driving economic growth, enhancing productivity, and creating jobs. Exploring these related topics can provide a deeper understanding of how investments in physical assets contribute to overall economic development and stability.


Sources & references

Arti

Arti

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Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000 Invezz related data points, has read every piece of research, news and guidance we\'ve ever produced, and is trained to never make up new...