🎧Investment: The Powerhouse Behind Economic Growth
How spending on physical goods and intellectual property helps the economy grow
Why do we want growth?
We want the economy to grow, or at least our part of it, so that we can spend less time working. This frees up time for family, relationships, and leisure.
For me, learning to do my job well involved using technology that was very new and yet familiar. I could stand in front of a whiteboard that was enabled with a capture system for what was going on on the board and for audio.
Then I recreated the graphs and problems I did in class. My online students loved it and they got better grades.
Think about you and all the technology you use for your jobs and for writing on Substack.
What do businesses get from Investment?
Someone had to put money into producing these processes. That’s what starts investment in intellectual property. And in other goods that make the things we need and want.
In the last post in our GDP series, we talked about household savings. [1] We saw that household savings gives banks and other financial firms money to loan to businesses for Investment.
Investment is what businesses spend on physical capital and intellectual property to help them make more stuff now and in the future.
Investment is one of the most important components of GDP. Investment increases how much an economy can produce.
For example, in the 1980s, accounting software improved the accuracy and speed of financial reporting. If an accountant spends less time preparing a financial statement, like a balance sheet or income statement, then they can spend more time looking for problems.
Investment can also help us learn new ways to make things better or faster. Before I learned to “compose” on a computer, writing took me a long time. I’m still slow, but when I finish, I have work I can run through another tool, NaturalReader, to help me catch mistakes. The work is already in digital form for publishing.
That saves me time and paper.
Using robotic aid helps surgeons work more quickly and safely. They can also take care of more patients. Freeing up workers from time-consuming tasks can help them get more done.
In addition, if we produce more, then we can employ more people.
Investment is composed of four parts: business (nonresidential) equipment, new structures including residential housing, changes in inventory, and nonresidential intellectual property.
Let's look at each. I'll include examples as well as the determinants of each part. Determinants are what make spending change. For example, an increase in income, a determinant, causes Consumption (household spending) to rise.
Business equipment
Business equipment includes robotic arms for assembly, office equipment and furniture, computers, and fleet trucks.
These are the things that help businesses create a stream of earnings. They can include a robotic arm to assist surgery or to put a car together. Most businesses use computers to keep track of customers and operations. Fleet trucks help businesses go to their customers to solve problems.
The main determinant of business equipment spending is the cost. The more a piece of machinery, like a backhoe, costs, the fewer businesses will buy. For example, the pandemic drove the costs of new farm equipment up so much that farmers got into bidding wars over used tractors and other costly machinery.
If tariffs are higher on the parts of a piece of equipment, then costs also rise.
Another primary determinant of Investment spending is interest rates. As interest rates rise, the more expensive financing becomes. The ability of an expensive tractor to yield a profit falls.
The other main determinant is expected demand. If a furniture company is worried about a recession, for instance, they may hold off on buying wood routers and sanding machines.
These three determinants, plus taxes and tariffs, also affect the other types of Investment spending.
New structures: non-residential and residential
Construction of new structures helps companies do business. For example, a restaurant needs room for a kitchen. Self-storage spaces need temporary garage-like buildings for their customers.
New hospital buildings, refineries, retail space, and manufacturing facilities are all part of nonresidential construction. As with our car example in the post entitled “Would You Buy a $300 Pair of Socks?” If construction spans a number of years, the increase in Investment and GDP occurs over those years. [2]
New structures also include new residential construction like apartments and new homes.
Changes in inventories
Anytime a business stockpiles new parts or products, they’re adding to inventories and to Investment. For instance, when I talked about my hairstylist in the $300 socks post, I noted that she kept certain products on hand to help her do her job.
But the hair salon also keeps products on hand to sell to customers.
During the earlier months of 2025, many retailers added extra stock to avoid added tariffs. For months when the change in inventories was positive, Investment rose.
The next few months may see retailers drawing down on those inventories causing Investment to fall. Over the course of a year, expected demand and the cost of keeping inventories affect how inventories change.
In part 2, we’ll discuss intellectual property and patents and copyrights. We’ll also talk about financial capital.
Thank you for reading,
Nikki
There’s so much more to learn about the economy. Join me at Nikki’s Economics Stories!
[1]
Is Household Saving Bad for the Economy?
I recently asked a group of writers, “Why do we save?” Here are some of their responses:
[2] https://nikkifinlay.substack.com/p/would-you-buy-a-pair-of-300-socks
Good explanation of how economy grows or not, Nikki.