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It is very important that you remember – there are two different meanings to the word investment in Economics. To understand the way in which each type can affect us, we will examine them separately:

Investment: In this instance, we are looking at the role of investment when we use our personal funds to try and gain a financial return. This could be through the sharemarket, or even just by putting money into a term deposit at the bank.

Investing our money in this way has two easily identifiable results. The first is that money that has been invested can not be spent. When we choose to invest our money, we are delaying our consumption, and as a result even if the investment option that we choose does not make any profit at all, we will (probably) still have access to those funds at a later date. In other words, in most instances the “worst case scenario” is that a person who invests their money is in fact just saving some.

However, it is also true that people who invest their money are more likely to generate a higher level of wealth. While the sharemarket certainly varies over time, the general trend is for it to increase. Those who take this risk will generate higher levels of wealth, and as a result they will tend to be more financially secure in the future.

Investment Spending: Recall that this is when businesses choose to spend money on capital assets. This is very significant for the economy as a whole, and it is also more important for you to understand at this stage of your study of Economics.

When a business is willing to use some of their money to buy new assets, it is generally a way of adding to the productive capacity of that business. In other words, once the new assets are in place, the business will be able to produce more. This will help to add to economic growth, and as a result we will have more goods and services available in Australia.

It follows that any increase in production could lead to job creation. If a business purchases new assets then it will also need people to work with those assets. As a result, an increase in investment spending could also lead to a fall in the unemployment rate.

It is also worth considering the impact of an increase in investment spending on productivity. When a business purchases a new asset, they will generally purchase one which is newer than the version that they are replacing. For example, when someone buys the Microsoft Office software package today, they will almost certainly buy Office 2007. This version has features not offered in the earlier versions, and as a result there are more things that the owners of this software can do. Jobs that were previously sent to printers can now be completed in-house, and this saves both time and money. An increase in productivity like this will have a significant impact on the productive capacity of an economy.

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