Introduction
Courses on Khan Academy are always 100% free. Start practicing—and saving your progress—now: www.khanacademy.org/economics-finance-domain/ap-macroeconomics/economic-iondicators-and-the-business-cycle/21/v/investment-and-consumption
Difference between every day and economic notions of investment and consumption
Watch the next lesson: www.khanacademy.org/economics-finance-domain/macroeconomics/gdp-topic/GDP-components-tutorial/v/income-and-expenditure-views-of-gdp
Missed the previous lesson? www.khanacademy.org/economics-finance-domain/macroeconomics/gdp-topic/circular-econ-gdp-tutorial/v/more-on-final-and-intermediate-gdp-contributions
Macroeconomics on Khan Academy: Topics covered in a traditional college level introductory macroeconomics course
About Khan Academy: Khan Academy offers practice exercises, instructional videos, and a personalized learning dashboard that empower learners to study at their own pace in and outside of the classroom. We tackle math, science, computer programming, history, art history, economics, and more. Our math missions guide learners from kindergarten to calculus using state-of-the-art, adaptive technology that identifies strengths and learning gaps. We've also partnered with institutions like NASA, The Museum of Modern Art, The California Academy of Sciences, and MIT to offer specialized content.
For free. For everyone. Forever. #YouCanLearnAnything
Subscribe to Khan Academy's Macroeconomics channel: www.youtube.com/channel/UCBytY7pnP0GAHB3C8vDeXvg
Subscribe to Khan Academy: www.youtube.com/subscription_center
Video
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 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, or these classifications, to understand where GDP is coming.
From.
So in everyday--.
Let me draw a line over here.
This is going to be everyday or.
Conversational, versions of this term.
And down here, we'll put the economics, the economic versions of this term, especially when we think of it in the context of accounting for GDP.
And they're, not necessarily all that different.
But.
They are different in important ways.
So in investment, really in both cases.
You can generally view it as something that you do to get some future gain.
So for example.
If I today build a house-- so I build a house.
So that is the house.
I built it today.
And.
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, a 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 you buy a bond, which is essentially you lending money to someone.
Else.
That is an investment in the everyday sense of it.
Because.
When have that asset, when you've bought that asset, it's going to pay off something in the future.
It's going to pay off some interest or 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, say education, because you invest that time and energy and 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 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, whatever that object is, if you just 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're investing so that you can get future benefit that could lead to consumption.
Because at the end of the day.
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 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 define economic investment as spending on capital.
Equipment.
Capital equipment 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, the things that have to cart things.
Around.
That is capital.
Equipment.
It would be things like inventory.
So for example, the inventory-- and 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 things like even the structures, the buildings.
And, so for all of this, in the economic sense, and this is why it's easier to account for, this, for the most part, is being done by the firms.
And.
It also includes the one thing that households do, which is construction of new homes.
This, is from the households.
Actually.
The buying of a house does not show up in consumption or investment, because nothing new was produced.
Something just exchanged hands.
So.
Whenever we talk about any of these things, especially when we're talking about it in 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.
It 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--.
Let me draw a little bit of a line right over here-- consumption is considered to be any spending on final goods by households, except for new homes.
And.
Let me make this even clearer., Because remember.
If we're just transferring goods, that shouldn't count.
So, let me put it on newly produced final goods.
Now.
What's unintuitive a little bit over here, is, according to the way we account for GDP, the tuition that you spend on a college education, that is new spending on final goods.
And here are the final goods or services.
The service you're? Getting is your education., That would be consumption.
So education would fall here in the economic sense.
While.
In the every day, 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.
There's, an argument that that would be an investment in the everyday sense.
By.
Having that car, you have something that can take you to work.
Every day., So you're, getting future benefit.
So, there's an argument that maybe that's an investment in the everyday sense.
But in the accounting sense, that car would sit right.
Here.
You bought a new car.
But that is considered.
Consumption.
You did not buy a new house.
And the whole reason, at least as far as I understand.
Why it's set up this way is this: is this 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 on top of that, when households purchase new homes.
We also call that investment.
And, that's just easier 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.
There are a few other categories in terms of things that the government do.
And, then we'll have to think about imports and exports.
FAQs
What is the national income Khan Academy? ›
National income includes all income earned: wages, profits, rent, and profit income.
What are the national income methods to measure national income? ›- Income Method.
- Product/ Value Added Method.
- Expenditure Method.
C = A + MD where C is the consumer spending, A is autonomous consumption (spending regardless of income levels), M is the marginal propensity to consume (the amount of additional income needed to spend on goods and services rather than saving it), and D is the amount of real disposable income required.
What is the theory of consumption and investment? ›Consumption And Investment Theory
Investment and consumption are interrelated. Investments are the sum of any income received minus the amount consumed. Keynes' theory of consumption, commonly known as “absolute income theory,” emphasizes the absolute size of income as a factor in determining consumption.
Khan Academy is a 501(c)(3) nonprofit organization, mostly funded by donations coming from philanthropic organizations. On its IRS form 990, the organization reported $31 million in revenues in 2018 and $28 million in 2019, including $839,000 in 2019 compensation for Khan as CEO.
Is Khan Academy really non profit? ›Our mission is to provide a free, world-class education to anyone, anywhere. Khan Academy is a 501(c)(3) nonprofit organization.
What are the 5 measures of national income? ›- Gross Domestic Product (GDP)
- Net National Product (NNP)
- Gross National Product (GNP)
- Personal income.
- Disposable income.
- Lack of reliable statistical data creates difficulty in estimating national income.
- Services of housewives are not included in national income.
- Ignorance and illiteracy of the people create problems in collecting statistical data.
The gross national product (GNP) is the most comprehensive measure to calculate the national income. Gross National Product (GNP) is defined as the total value of final goods and services produced by a country's citizens in a year, regardless of their location.
What is national income consumption? ›What is Consumption? Consumption is defined as the use of goods and services by a household. It is a component in the calculation of the Gross Domestic Product (GDP). Macroeconomists typically use consumption as a proxy of the overall economy.
What is the Keynesian theory of consumption? ›
Keynesians believe that, because prices are somewhat rigid, fluctuations in any component of spending—consumption, investment, or government expenditures—cause output to change. If government spending increases, for example, and all other spending components remain constant, then output will increase.
What is the Keynesian law of consumption? ›Keynesian Psychological Law of Consumption
When the income of a person increases, consumption also increases but at a lesser rate and a part of the income is saved. So simply as income increases rate of saving increases.
The theories are: 1. The Accelerator Theory of Investment 2. The Internal Funds Theory of Investment 3. The Neoclassical Theory of Investment.
What are the three important theories of consumption? ›The three most important theories of consumption are as follows: 1. Relative Income Theory of Consumption 2. Life Cycle Theory of Consumption 3. Permanent Income Theory of Consumption.
What are the three theories of consumption? ›It also describes the main mainstream theories of consumption, which are the life cycle income hypothesis, the permanent income hypothesis and the random walk theory of consumption.
Does Bill Gates fund Khan Academy? ›Barely a year after Khan quit his hedge-fund job, the Gates Foundation invested $1.5 million to expand operation of the Khan Academy, followed not long after by another $4 million donation.
What are the criticism of Khan Academy? ›The videos are cookie-cutter, impersonal, and lack any sort of teacher interaction. While the videos do provide an explanation of content, this is far from the whole teaching experience. With Khan Academy, students don't experience the nuances and complexities of a classroom environment.
Why is Khan Academy so effective? ›Khan Academy is continually growing, so new subjects and videos are added regularly. You can learn and work at your own pace. You can fast forward, rewind, repeat videos, stop and work out a problem on your own, all without having to consider other students' or the teacher's pace.
How much does the CEO of Khan Academy make? ›| Pros | Cons |
|---|---|
| Courses are high-quality and created by experts knowledgeable on the subjects. There are videos, quizzes, and readings. | Not the best interactivity, classes are not very in-depth |
How credible is Khan Academy? ›
Given what it offers and the fact that it's entirely free to use, Khan Academy is the best learning site for academic subjects and an Editors' Choice pick. Since 1982, PCMag has tested and rated thousands of products to help you make better buying decisions.
Is national income and GDP same? ›Both GDP and National Income help to estimate a country's economic performance. They are calculated differently and provide different information. GDP measures production within a country's borders, while National Income measures the income earned by factors of production within a country's economy.
What are the three basic formula of national income? ›National Income = C (household consumption) + G (government expenditure) + I (investment expense) + NX (net exports).
Which is the most used method to calculate measuring income? ›The most common method is the GDP.
What is the most important measure in national income? ›The broadest and most widely used measure of national income is gross domestic product (GDP), the value of expenditures on final goods and services at market prices produced by domestic factors of production (labor, capital, materials) during the year.
What are the three 3 problems that may encountered when calculating the national income? ›All unlawful and illegal activities, whether economic or not, are omitted from national income accounting. Income earned through illegal activities like smuggling, black- marketing, gambling, betting, adulteration, bribery etc.
What is not measured in national income? ›Profit Method is not a method of measuring national income. Product Method, Income Method, Expenditure Method are methods of measuring national income. In product method, national income is measured as a flow of goods and services.
What are the two purposes of measuring of national income? ›By measuring the national income, the authorities can analyse the economic growth of a country and accordingly take measures for future development and set up the economic policy.
What are the 4 types of consumption? ›- Productive Consumption. ...
- Slow Consumption. ...
- Quick Consumption. ...
- Wasteful Consumption. ...
- Income − The budget constraints effects in consumer choices are usually expressed with two products on the vertical and horizontal axes.
Consumption is the purchase of goods and services for the acquisition of current utility. Investment is expenditure on capital goods for the acquisition of future utility. Investment increases the capital stock.
What is the relationship between income and consumption? ›
Answer and Explanation: The relationship between income and consumption is that when income grows, disposable income rises, contributing to consumers purchasing more goods and services. The higher the level of income, the higher the disposal level, resulting in more consumption from the consumers.
What is the Keynesian relationship between consumption and income? ›According to him, as the income increases, consumption increases but not in the same proportion. The proportion of consumption to income is called average propensity to consume (APC). Thus, Keynes argues that average propensity to consume (APC) falls as income increases.
What is Keynesian economics for dummies? ›Its concept is simple. Spending from one consumer becomes income for a business that then spends on equipment, worker wages, energy, materials, purchased services, taxes, and investor returns. That worker's income can then be spent, and the cycle continues.
What is the formula of Keynesian consumption model? ›C = a + b(Y) where a and b are constants. While a is intercept term of the consumption function, b stands for the slope of the consumption function and therefore represents marginal propensity to consume- change in consumption in response to change in income.
What are the basic characteristics of the Keynesian consumption function? ›The Keynesian consumption function is based on Keynes' beliefs about consumer behavior. Keynes states that consumption depends on the absolute income available in the given period. In other words, the more income a household has in a given period, the more likely it is to be spent on consumption.
What is the consumption theory? ›Consumer theory is the study of how people decide to spend their money based on their individual preferences and budget constraints. A branch of microeconomics, consumer theory shows how individuals make choices subject to how much income they have available to spend and the prices of goods and services.
What are the 3 D's of investing? ›Diversification. Dividends. Discipline. Christopher Quinley, CFP®, CIMA®, AAMS®, the co-founder of Liang & Quinley Wealth Management, says that one of his key tips for financial health is to invest using the three Ds: diversification, dividends, and discipline.
What are the three 3 key elements of an investment strategy? ›- Risk tolerance.
- Expected returns.
- Effort required to implement the strategy.
Two common approaches to portfolio construction are top-down and bottom-up investing. A top-down process generally places more emphasis on macroeconomic forecasts than on individual stock picking—which is the primary focus in a bottom-up investing process.
What are the 4 determinants of consumption? ›4. What are some of the key determinants of consumption? The key determinants of consumption include income, savings, expectations, changes in fiscal policy, debt levels, and the availability of goods and services.
What are the 5 types of consumption? ›
As shown in Figure 1, the theory identifies five consumption values influencing consumer choice behavior. These are functional value, social value, emotional value, epistemic value, and conditional value. A decision may be influenced by any or all of the five consumption values.
What are the theories of income consumption? ›The permanent income hypothesis is a theory of consumer spending stating that people will spend money at a level consistent with their expected long-term average income. The level of expected long-term income then becomes thought of as the level of “permanent” income that can be safely spent.
What is national income? ›National income is referred to as the total monetary value of all services and goods that are produced by a nation during a period of time. In other words, it is the sum of all the factor income that is generated during a production year. National income serves as an indicator of the nation's economic activity.
What is income national income? ›The National Income is the total amount of income accruing to a country from economic activities in a years time. It includes payments made to all resources either in the form of wages, interest, rent, and profits.
What is the national income in macroeconomics? ›National income is the total income created by producing the national product. Accounting identity: national income equals national product. The production of one dollar of goods or services creates one dollar of income.
What is national real income? ›Real national income is nominal or money national income (output) adjusted for inflation. It is also national income at 'at constant prices. The most frequently used measure of national income is Gross Domestic Product (GDP).
What is the difference between GDP and national income? ›National Income is the total value of all services and goods produced within a country and the income from abroad for a given period, usually a year. GDP is the value of the goods and services produced within a country. GDP, GNP, and GNI determine the national income.
Why is it important to measure national income? ›Computation of National Income is very vital as it indicates the overall health of our economy for that particular year. The aggregate economic performance of a nation is calculated with the help of National income data.
What is the significance of measuring national income? ›The National Income is based on the economic activity of a country. By measuring the national income, the authorities can analyse the economic growth of a country and accordingly take measures for future development and set up the economic policy.
What are the 4 difficulties in measurement of national income? ›lack of adequate data, 3. non-availability of reliable information, 4. choice of method, 5. lack of differentiation in economic functioning, 6.
What are the 4 sectors of the economy? ›
There are four types of sector groupings in the economy: primary, secondary, tertiary, and quaternary.
What are the three types of GDP? ›GDP can be measured in three different ways: the value added approach, the income approach (how much is earned as income on resources used to make stuff), and the expenditures approach (how much is spent on stuff).
What causes national income increase? ›An increase in investment raises aggregate demand. National income and employment will rise until equilibrium is restored, i.e. where savings = investment. A decrease in investment has the opposite effect. However, national income will change by more than the change in investment.
Is national income adjusted for inflation? ›The value of national income adjusted for inflation is called Real national income. This is adjusted for inflation which is calculated from a reference year which is also called as base year.
Is real GDP equal to national income? ›As you can see, National income does not equal GDP. There are some expenditures (that are included in the expenditures approach) that are not income (therefore not included in the income approach).