Firms must Invest

• Besides producing and paying workers/owners, firms must also Invest. In economics, investment means:

• Buying machinery, equipment, and software

• Adding to finished-goods inventory

• Buying new housing.

• This outflow is called investment spending and is denoted as “I”.

• Of course, investment is an out-flow of money from firms. Firms find the money to pay for investment spending by selling new issues of stocks and bonds, or by borrowing from banks and financial markets.

• Firms also face a budget constraint: the total payments (wages, profits, interest, rent) + investment spending must = total sales of goods (GDP) + borrowing.