The Effect of Investment on the GDP

by Ben Taylor; Updated September 26, 2017
Business investments cause GDP fluctuations.

Four factors comprise a nation's Gross Domestic Product, GDP: government spending, consumer spending, investments made by industry and the excess of exports versus imports. GDP is a measurement of all the goods an economy produces in a given time, investments included. However, when calculating GDP, "investment" doesn't mean buying securities, according to Mind Tools. It is a term used to encompass how businesses invest its money in the physical operations such as factories, offices, warehouses and computers.

Economic Conditions Depend on Business Investments

The GDP increases when businesses invest money in infrastructure, real estate and other physical operations. Accordingly, when business and other private sector investments taper off, the GDP tends to follow suit. Other factors comprising GDP must pick up the slack when one factor is reduced, according to American Progress. Aside from consumption, business investment is the most powerful catalyst in calculating an economy's GDP. Also, industries whose businesses tend to invest more of its profits tend to grow and comprise a larger percentage of GDP.

Business Investments Enable Speculation

An economy's Gross Domestic Product, GDP, tends to go in the same direction as the investments its businesses make. As a component of GDP, business investments also allow economists and other analysts to predict which direction an economy will go. For example, Qatar wants to become a knowledge-based economy, according to Arabian Business. The Qatari GDP will conceivably grow as more organizations invest in education and research, therefore GDP growth can correlate to investment. Future events, such as the World Cup, which Qatar will host in 2022, also allow analysts to speculate on the economy's future by reviewing which industries are likely to make investments in the event.

Investments Can Cause a Boom

Aside from being a prime mover in economic change, a country whose GDP is saturated with business investments can approach an economic boom. For example, before the 2008 economic crisis, India's GDP was 38 percent business investments, which, according to the Financial Express, coincided with the country's heightened economic performance. An economy is most robust when its businesses make financial investments that enable it to produce more and sustain more growth. Financial investment can also have an impact on other GDP factors, such as consumer spending, by creating jobs and creating buying power for consumers.

Investments Can Also Cause a Bust

The financial river flows both ways. As indicators of economic change, when an economy's GDP contracts due to slowing business investment, a bust can be on the horizon. At the height of the financial recession in 2008 and 2009, India's GDP fell about five percent, which the Financial Express attributes to businesses not investing money in inventory. When a business cannot afford to invest in new inventories and physical spaces, its production decreases or stagnates; that effect translates into economic uncertainty and a diminished appetite for financial risk, according to The Daily Mail.

About the Author

Ben Taylor has been writing since 2005 and has had work published by WEKU-FM and West Virginia Public Broadcasting both on air and online. Taylor holds a Master of Arts in English from Eastern Kentucky University and currently teaches composition and ESL there.

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