The word private investment in the subject of economics isn’t necessarily what you think it means. There are many terms and related subjects that all come under the umbrella of private investments.
What is private investment?
Private investment, from an economics viewpoint, is the purchase of a capital asset that’s expected to provide income, appreciate in value, or both generate financial gain and appreciate in value. A capital asset is just property that’s not easily sold and is mostly purchased to help an investor to generate a profit. Examples of capital assets include land, buildings, machinery, and equipment.
Investment and Savings
Investment isn’t identical to as savings in the world of economics. If you’re not buying a capital asset that’s accustomed to generate income, such as a machine, or with the expectation that it’ll increase in value, like a house, then you’re saving, not investing.
You can save a lot more than you invest, like when a business purchases equipment with part of its profit and puts the remainder of the profit in a savings account. On the other hand, you’ll be able to actually invest more than you save. In fact, many of us invest more than they save once they finance the purchase of a house, which could be a capital asset.
It’s attainable to invest more than you have in savings because the savings of other people is accustomed to finance your own investments. A classic example of this can be a straightforward savings account. Once you deposit cash into a bank account, you’re making money accessible to the bank to lend to other people who wish to invest. The bank pays you an interest rate for the utilization of your money, while it charges a higher interest to people seeking to use the money for investment.
You probably see a strong relationship between investment and savings at this time. Savings accounts offer the funds to create investments possible and verify the value purchased investing through borrowing. You can consider the value of borrowing as the interest rate you need to pay on money borrowed.
If the availability of savings on the market for lending increases, the interest rate on the market will decrease, assuming all alternative factors stay constant. On the other hand, if the supply of savings on the market for lending decreases, interest rates will increase as borrowers compete for loans. Interest rates stabilize where demand for funds equals the supplies of funds.