There are three vital processes of an economy: Production, Consumption and investment. They are inter-related.
Activities that create goods or services are called productions.
It includes not only making of various goods but also the services.
Production includes the goods made and services provided in economy.
It can be described as act of satisfying one’s wants.
It includes consumption of goods and services both.
Example: We consume food, clothes, furniture etc., Services of tailors, barbers, tutors etc.
It is determined by level of production in economy.
Addition of new capital goods to existing stock of capital goods is called investment.
Stock produced during a year is not generally acquired for consumption in that year.
Generally production exceeds consumption during year. It is due to following reason:
Goods lying with production unit
Durable goods acquired by production unit
Additional capital goods to existing stock of capital goods are inventory or stock investment.
Stock at beginning of year is called as opening stock. Similarly stock exist at end of year is called closing stock.
Excess of closing stock over opening stock is called inventory investment.
Acquiring producer goods by production unit is called fixed investment.
Investment equals sum of inventory invention and fixed investment.
Capital formation is alternative name of investment.
Sum of inventory investment and fixed investment is called gross investment.
Gross investment is distinguished from net investment.
Income spent on acquiring goods and services for satisfaction is called consumption expenditure. Unspent part of income is called ‘saving’. Savings play very important role in production process.
Production is the source of consumption and investment.
Consumption provides motivation for production and Investment.
Investment determines the level of production.
Saving is the major source of financing investment.