3.12: Planned Investment vs. Actual Investment

Investment includes business spending on capital goods and changes in inventories.

Economists distinguish between planned investment and actual investment. Planned investment is what businesses intend to add to capital goods and inventories. Actual investment reflects the investment that businesses actually make.

Businesses spend on capital goods such as trucks and computers. While investment in capital like machinery is always a deliberate, planned action, the second component of investment - changes in inventories- can be both planned and unplanned.

Change in inventories captures additions to or reductions in unsold goods during a period. Unsold goods are considered an investment because the firm has spent money to produce them, and they represent a stock of value that can generate future sales.

Suppose a car manufacturing firm starts with zero cars in inventory and plans to keep the inventory unchanged. It produces one million cars, expecting to sell them all. But if only nine hundred thousand cars are sold, the unsold 100 thousand cars create an unplanned addition to inventory. This means that the actual investment differs from the planned investment. When a firm’s actual sales are less than expectations, there is a rise in unplanned inventory. This unplanned rise in inventory decreases the firm’s current income but increases the firm’s potential future sales. This illustrates how the impacts of changes in planned investment differ from the impacts of unplanned investment. This unplanned change causes actual investment to differ from planned investment.

In equilibrium analysis, the term investment refers specifically to planned investment.

Investment includes business spending on capital goods like machines and tools and changes in inventories, which capture additions to or reductions in unsold goods during a period.

Economists distinguish between planned and actual investment.

Planned investment is what businesses intend to add to capital goods and inventories.

Actual investment reflects the investment that is actually made.

For instance, a car manufacturing company plans to purchase fifty automated guided vehicles. Such additions to the capital stock are deliberate, so planned and actual investments usually match.

Inventories are less predictable. Suppose the firm starts with zero cars in inventory and plans to keep the inventory unchanged. It produces one million, expecting to sell them all. But if only nine hundred thousand are sold, the unsold one hundred thousand cars are added to the inventory. This unplanned change causes actual investment to differ from planned investment.

When sales don’t match expectations, actual investment can differ from planned investment.

In equilibrium analysis, the term investment refers specifically to planned investment.