Fixed business investment
Topic: National Income Accounting: GDP, GVA and Welfare · NCERT: Class 12, Ch 2 "National Income Accounting"
Meaning
Fixed business investment is what firms add to their machinery, factory buildings and equipment in a year. In economics, "investment" means capital formation, which is an addition to physical capital. It does not mean buying financial assets. Fixed business investment is one of the three categories of investment in national income accounting. The other two are residential investment (new housing) and a rise in inventories. It matters because these new capital goods raise the economy's ability to produce more in future years.
Example
A textile mill in Tiruppur installs new power looms and builds an extra shed. The value of these looms and the shed is fixed business investment for that year. A traditional weaver takes months to make one sari, while a modern mill makes thousands of garments a day. This is why capital added today raises output tomorrow.
Don't confuse with
- Financial investment: buying shares, property or an insurance policy is not investment in economics, because it adds no new physical capital.
- Residential investment: this is new housing, not the machines and buildings firms use for production.
Related concepts
- Value added
- Monetary value
- Value added method
- Gross Value Added
- Net value added
- Operating surplus
- Inventory
- Change in inventories
- Planned change in inventories
- Unplanned change in inventories