In economics, the definition of investment is quite strict.
- Investment means an increase in the capital stock – Gross fixed capital formation. Investment can involve
- The purchase of a larger factory
- The purchase of new automated machines to take part in the productive process.
- The purchase of new computers in a bank.
- The building of a new hospital.
What about saving money in a bank?
When we buy shares or put money in the bank. This is not seen as an investment – it is seen as a mere transfer of ownership – there is no increase in the productive capacity of the economy. Therefore ‘investing’ money in the bank is properly known as saving.
Of course, if we save money in a bank, it may encourage a firm to make a business loan. The firm may then use its business loan to fund investment in real capital investment, such as expansion of its business.
- In common terminology, we refer to ‘investing money’ in a bank. It is better to refer to this as ‘financial investment’ to avoid confusion.
- An investor is someone who increases the capital stock or engages in ‘financial investment’
Definition of Saving
Saving is income that is not consumed. It could be money put in a bank or saved in cash.
Investment = saving
In a closed economy, the level of saving will equal the level of investment
See explanation: Saving, Capital Stock, and Levels of Investment