Investment spending is a critical component of macroeconomics and calculating GDP. However, not all expenditures qualify as investment spending. Generally, investment refers to purchases of newly produced capital goods that will be used for future production. This includes business investments in equipment, machinery, buildings, inventories etc. However, some common expenditures are left out of investment spending calculation. Understanding what is excluded provides a clearer picture of true productive investment in the economy.
Consumption Spending
The largest exclusion from investment spending is consumption expenditures. This refers to spending by households and consumers on goods and services for current use. Things like food, clothing, restaurant meals, vacations, entertainment etc. are all consumption. Since these provide utility in the present rather than contribute to future production, they are not counted as investments.
Intermediate Goods
Many firms purchase raw materials, component parts, semi-finished goods etc. as inputs into their production processes. However, actual investment only includes final goods, so these intermediate goods are excluded. Counting both the intermediate goods and the final goods would lead to double counting in GDP.
Used Capital Goods
Actual investment spending focuses on newly produced goods, so trade in existing assets is excluded. The purchase of a used machine by a business would not qualify as investment spending. However, brokerage commissions earned in facilitating such used asset transactions would count as investment spending.
Financial Assets
Actual investment spending seeks to capture real business capital formation. Hence, purely financial transactions like purchase of stocks and bonds are excluded from investment. Only tangible capital goods count towards investment spending.
Non-Market Transactions
Barter transactions and goods produced for own use do not involve market sales so remain outside measured investment spending. Similarly, investment excludes illegal and underground production.
In summary, actual investment spending excludes consumption expenditures, purchases of intermediate and used goods, financial transactions and non-market production. Focusing on newly produced final capital goods provides a precise measure of true additions to an economy’s productive capacity.