Every action has a reaction and so is true even for the investment arena. Talking about the macroeconomics here, the spending done by individuals affects the overall balance side of the economy.
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.
How to Calculate Investment Spending?
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).
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.
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
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
I = 9,000
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!