If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content
Current time:0:00Total duration:7:32
MEA‑1 (EU)
MEA‑1.A (LO)
MEA‑1.A.3 (EK)

Video transcript

what I want to do in this video is compare investment to consumption and we're going to think about it in two contexts one I would call the everyday conventional context and then the other one would be how we would think about it in an economics context because these words mean something very something very particular to an economist and that's important that it means something particular because we're going to start using these words or this terminology these classifications to understand where GDP is coming from so at every day so let me draw a line over here so this is going to be this is kind of everyday everyday or conversational versions of this term and know down here we'll put the economics the economic the economic versions of this term especially when we think of it in the in the context of accounting for GDP and they're not necessarily all that different but they are different in important ways so an investment really in both cases you can generally view it is something that you do to get some future gains so for example if I today build a house so I build a house so that is the house I built today and then this will be the timeline the house will keep lasting and it's an investment because it's going to be giving me future gain a year from now I'll still be able to live in that house so I will have the saved rent that's a future gain future gain two years from now it'll keep giving some type of gain you could have a financial instrument maybe some type of debt instrument you're lending money to someone else so maybe maybe you buy a bond which is essentially you lending money to someone else that is an investment because in the in the everyday sense of it because when you when you make when you have that asset you've bought that asset it's going to pay off something in the future it's going to pay off some interest or what if some profits and in the everyday sense I would consider something like hopefully it would be going to college would be an investment so education I'll state education because you invest that time and energy in education it's going to keep paying off hopefully by doing that you're going to get better employment and higher wages the rest of your life it will keep paying off so this is the everyday notion of investment the everyday notion of consumption the way I think about it is you are you are buying something or you're doing something that you're just going to use up in the short-term and just by using it up so whatever whatever that object is if you just use it up so use use it up and it's just going to hopefully benefit you in some way but it's more of a short-term thing I would consider that consumption in the everyday sense so if you go buy a candy bar and eat it you have consumed the candy bar you have not made an investment if you go to a movie that is consumption and I'm not making any value judgment that one is better than the other investment at the end of the day you are investing so that you can get future future benefit that could lead to consumption because at the end of the consumption is one of the things that might make your life a little bit better off so I'm not saying that one is better than the other but watching a movie that would also be consumption spending time buying a book well you could debate whether that's education or not but let's say you're you you buy a book that is not educational that is consumption but it is making you happier hopefully it's making your life better in some way now the economic definitions are related to these everyday definitions but they're a little bit more precise and they make the definitions in a way that they're easier to account for if you are a nation they're easier to keep track of so the way an economist would define it they would defined economic investment as spending on capital equipment capital equipment so capital equipment are things like are things like if you are a factory you will buy the equipment to run your factory you buy the robots and you buy the assembly line and you buy the wheelbarrows or whatever else things that have to cart things around that is capital equipment it would be things like inventory inventory so for example the inventory this is still not so different both of these things are being used to produce things in the future to produce future benefit you're buying that inventory sometimes raw material you're going to add value to it and then they're going to be used to produce something in the future it includes it includes things like even the structures the buildings the structures and and so for all of this economic sense and this was why it's easier to account for this for the most part is being done by the firm's and it also includes it also includes the one thing that households do which is build construction of new homes new new homes this is from the households households actually the buying of a house does not show up in consumption or investment because nothing new was produced something just changed hands so whenever we talk about any of these things especially when we're talking about it in kind of precise economic terms it's the production of new capital equipment new inventory new structures new homes if I just buy a factory from someone else that does not add to GDP would not be considered investment or consumption because I'm just transferring an asset from one person to another it would only be added to GDP when it is first created and on the consumption side from an economic point of view so let me draw a little bit of a line right over here consumption is considered to be any spending any spending on final goods on final goods by households by households except for new homes except for new homes and let me make this even clearer because we remember if we're just transferring goods that shouldn't count so let me put it on new on newly produced final goods now what's unintuitive a little bit over here is according to the the way we account for GDP you're the tuition that you spend on a college education that is new spending on final goods and here the final goods let me write final goods or services the service you're getting is your education that would be consumption in it so education would fall here in the economic sense while in the everyday sense I would consider education right over here maybe you are buying a car and you're not buying a car for leisure purposes you're buying a car because you need your car to go to work that could is there's an argument that that would be an investment in the everyday sense by buying by having that car you have something that can take you to work every day so you're getting future benefits so there's an argument that maybe that's an investment in the everyday sense but in the since that car so the car would sit right here you bought a new car but that is considered consumption you did not you did not buy a new house and the whole reason that at least as far as I understand the whole reason why it's set up this way is this is easier to account for you look at all of the spending by firms that's easy to account for you essentially call that investment because at the end of the day all the spending that firms are making is they're doing it to produce some good or service so we call this investment any spending that the firms do and then on top of that when households purchase new homes we also call that investment and that's just easier for for the accounting Offices of governments to keep track of and everything else that households do we consider consumption and we'll see in the next few videos are a few other categories in terms of things that the government do and then we'll have to think about imports and exports