Investment. It’s a common-enough term, typically defined as an addition to existing capital. It can take the form of structures such as buildings, machinery, and residential housing. So, investment always contributes to the increase of physical capital and growth of the economy, right? Not quite. Investment has two components that complicate things a bit: change in inventories and depreciation.
Change in inventories can be positive or negative, and technically all investment could take the form of inventories and contribute nothing to our stock of buildings and machinery. More importantly, and what we focus on here, is that capital depreciates. Machinery breaks and buildings fall into disrepair, so capital requires upkeep or it becomes obsolete. Often, investment more than replaces this depreciated capital; occasionally, though, investment isn’t so robust.
The graph shows two series: real gross investment and real net investment. Gross investment is always in positive territory, despite strong fluctuations throughout the business cycle, which is what you’d generally expect from investment. Net investment removes the depreciated capital from the picture and isn’t always positive: In fact, in 2009, when the U.S. economy was in a deep recession, this measure dipped into negative territory.
How this graph was created: Search for “real net investment” and select the first series and add it to the graph. To add the second series, open the “Edit Graph” panel, search for “real investment,” and select the other series shown in the graph.
Suggested by Christian Zimmermann.
View on FRED, series used in this post: