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Home » Education » Finance education » What is Investment Spending Formula?

What is Investment Spending Formula?

by Fxigor

Table of Contents

  • What is investment spending?
  • How to Calculate Investment Spending?
  • Investment spending formula
  • Example of Investment Spending Formula
  • Solved Questions – In the language of macroeconomics, investment refers to
  • Conclusion

Every action has a reaction and so is true even for the investment arena. Talking about macroeconomics here, the spending done by individuals affects the overall balance side of the economy.

What is investment spending?

Investment spending represents money spent on capital goods used to produce other goods, capital, or services. It is a way of increasing output by utilizing or purchasing capital goods. Investment spending may include buying machinery, inputs, infrastructure, land, etc.

The expenditure done on capital equipment for the purpose of economic activities is called investment spending. It is also written as S = I. The question now is what is the investment spending formula and how to calculate investment spending. Well, let’s get into it without any wait.

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How to Calculate Investment Spending?

To calculate investment spending you need to collect consumption, investment, government spending, and net export.

There are a few formulas that we need to have knowledge of before knowing the formula of investment spending. The first one is the formula of the Gross Domestic Product (GDP).

Investment spending formula

The investing spending formula can be calculated using the formula of Gross Domestic Product (GDP) where total output is equal to the sum of the consumption, investment, government spending, and net exports.

Y = C + I + G + NX.

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NX = X – M

In this formula, GDP or total output is stated as Y, and it is equal to C, I, G, and NX, which are respectively consumption, investment, government spending, and net exports. Also, the total exports are the difference between total exports minus total imports.

In cases where the economy is closed, it means that the nation has no international trade or trade outside its borders. For such economies, the formula of GDP is as stated.

Y = C + I + G

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There are also chances of situations in which we assume that export and import quantities would be the same. So, in a closed economy, we can find the investment spending (I), buy reshuffling the GDP formula.

I = Y – C – G

This formula is also known as National Savings Formula. So, for a closed economy, it reflects S = I.

Example of Investment Spending Formula

The GDP of a country is 20,000, tax is 2,000, government spending is 5,000 and consumption is 6,000. Find Investment Spending.

Formula= I = Y – C – G

I = 20,000 – 6,000 – 5,000

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I = 9,000

Solved Questions – In the language of macroeconomics, investment refers to

In the language of macroeconomics, investment refers to :
a. saving
b. the purchase of new capital
c. the purchase of stocks, bonds, or mutual funds
d. all of the above are correct
B. the purchase of new capital
The correct answer is: In the language of macroeconomics, investment refers to the purchase of new capital.

Conclusion

The formula seems simple overall, but when it is done for the macro analysis at a larger stage, it involves a lot of complications and data. But we hope that we have cleared your basic understanding of the investment spending formula. Keep reading, keep learning! 

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Fxigor
Fxigor
Trader since 2007. Currently work for several prop trading companies.
Fxigor
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