Investment and Economic Activity

Read this chapter to examine factors that determine private investment and its link to output within the macroeconomy. Private investment plays an important role in the short run by influencing aggregate demand, and in the long run by influencing the rate of growth of the economy.

14.1 The Role and Nature of Investment


  • Investment adds to the nation's capital stock.
  • Gross private domestic investment includes the construction of nonresidential structures, the production of equipment and software, private residential construction, and changes in inventories.
  • The bulk of gross private domestic investment goes to the replacement of depreciated capital.
  • Investment is the most volatile component of GDP.
  • Investment represents a choice to postpone consumption – it requires saving.