What is a Private Investment? - Definition & Overview - Lesson | Study.com
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What is a Private Investment? - Definition & Overview

Lesson Transcript
Instructor Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

Private investment in the world of economics does not necessarily mean what you think it does. In this lesson, you'll learn what private investment is as well as its related concepts. You'll also have an opportunity to take a short quiz.

Private investment, from a macroeconomic standpoint, is the purchase of a capital asset that is expected to produce income, appreciate in value, or both generate income and appreciate in value. A capital asset is simply property that is not easily sold and is generally purchased to help an investor to generate a profit. Examples of capital assets include land, buildings, machinery, and equipment.

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  • 0:00 What Is Private Investment?
  • 0:26 Investment and Savings
  • 2:12 Lesson Summary

Investment is not the same as savings in the world of macroeconomics. If you are not purchasing a capital asset that is used to generate income, such as a machine, or with the expectation that it will appreciate in value, like a house, then you are saving, not investing.

You can save more than you invest, such as when a business purchases equipment with part of its profit and puts the rest of the profit in a savings account. On the other hand, you can actually invest more than you save. In fact, many people invest more than they save when they finance the purchase of a house, which is a capital asset.

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Let's review. Investment occurs when individuals or businesses purchase a capital asset with the intention of the asset either generating income, appreciating in value, or both. Investment is different than savings, which involves a decision not to use money for consumption. People that save generally want to earn a return on their savings through such financial products as savings or retirement accounts. In macroeconomic terms, use of such financial products constitutes savings.

Savings accounts supply the funding for investing through financing, such as when you borrow money to buy a house, which is considered an investment because it's a capital asset. An increase in savings will increase the supply of loanable funds, which will result in lower interest rates and more investment. If savings decrease, the supply of loanable funds will decrease, and interest rates will increase, pushing some investors out of the market.

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