"For long this area of economics syllabus has been ignored in the general texts and only a lip service to investment models is given in the aspects of infrastructure where you must have come across BOT,EPC,HAM,etc. models of PPP and related investments. Hence, with this article Abhipedia will try and enhance you basic understanding of Investment and the way its theoretical nuances have been built over the time. In software terms, it will help you understand the source code and not the mere apps. This artcle is first part of a series of article in this respect."

What investment is and what it is not
The term “investment” means something different to economists than it does to most of the rest of the world. For example, if you ask your banker about investment, she will probably start talking about stocks and mutual funds that she would like you to purchase, or new kinds of deposit accounts that her bank offers. To an economist, these purchases of financial assets are not investment from a social point of view because financial assets do not represent real net wealth for the economy as a whole. Instead, they reflect credit relationships within the economy. Financial assets such as loans and bank accounts represent contracts to pay interest and repay principal on borrowed money. Stocks represent partial ownership of a corporation, implying a right to vote on the governance of the corporation and to receive dividends as determined by the directors that the shareholders elect. In either case, the financial asset of one individual in the economy is offset by a financial liability of another person or corporation. Thus, when we aggregate the wealth of all members of the economy, these assets and liabilities cancel and financial assets disappear. Thus, if you “invest” in a financial asset, someone else is “disinvesting” at the same time, so aggregate, or social, investment does not rise.
Economists usually reserve the term investment for transactions that increase the magnitude of real aggregate wealth in the economy. This includes mainly the purchase (or production) of new real durable assets such as factories and machines.1 The category of investment that receives the most attention is business fixed investment, which is the purchase of new structures and equipment by business firms for production purposes. However, there are two other categories, and they are also important.
Inventory investment consists of increases in stocks of unsold goods or unused input materials. This kind of investment is quite different from business fixed investment because inventory capital normally has a very short life span. When inventories decrease from one period to the next, as sometimes happens even at an aggregate level, inventory investment is negative. Another unique feature of inventory investment is that it often occurs unintentionally. Unsold products are counted as inventory investment whether the firm bought them intending to build up its inventory or simply ended up selling less than it expected to sell.
Residential investment consists of purchases of new housing units, whether by firms or households. As discussed in the consumption chapter, new home purchases by households are counted as investment, with a monthly rental flow of housing services counted under consumption of services. Like inventory investment, residential investment tends to behave quite differently in some ways than business fixed investment.

Investment and the Business Cycle
Economists have long recognized that investment tends to be the most volatile of the components of expenditure over the business cycle. Of course, strong correlations between investment and output only mean that the two variables tend to move together; they do not allow us to determine the direction(s) of causality. For that, we need the framework of economic theory with which to interpret the data. Some economists have inferred from the high volatility of investment that fluctuations in investment demand are a major cause of business cycles. Others have argued that the wide variation in investment over the cycle reflects consumption smoothing: investment gets squeezed out as households attempt to maintain their consumption expenditures at a high level during recessions.

Keynes and the business cycle
A satisfactory theory of the business cycle was a pressing need in the 1930s, when the Great Depression inflicted widespread economic suffering on Europe and America. John Maynard Keynes attempted to fill that need with The General Theory of Employment, Interest and Money, which he wrote in 1935. Although the ambiguities in The General Theory have proved sufficient to sustain a huge literature attempting to interpret Keynes, one of the points on which most scholars agree is that Keynes believed that fluctuations in investment were the primary source of cyclical fluctuations. Keynes began by rejecting the classical assumption that the economy automatically reverts to full employment quickly and reliably. Under conditions where markets do not clear, he argued, a shortage of aggregate demand may prevent the economy from producing at full capacity. Since investment is the component of aggregate demand that falls most strongly in business-cycle downturns, it was a natural candidate for Keynes in his search for the causes of these declines in demand.
The underlying principles of Keynes’s theory of investment do not differ much from the theories that we study today. This theory asserts that investment is the result of firms balancing the expected return on new capital—we call it the marginal product of capital; he called the marginal efficiency of capital—with the cost of capital, which depends primarily on the real interest rate. However, Keynes and classical economists emphasized different kinds of fluctuations within this similar framework. Classical (and often modern) economists usually emphasized the effect that changes in real interest rates have on investment. This effect occurs as firms move up and down on their downward-sloping investment-demand curves. Keynes believed that the large fluctuations in investment were due to shifts in the investment-demand curve itself rather than to movements along the curve.
According to Keynes’s theory, the investment-demand curve is volatile because it depends on firms’ expectations of the profitability of investment. Keynes thought that the “animal spirits” of investors tended to fluctuate wildly in waves of optimism and pessimism. He viewed the business cycle as a sequence of contagious spells of over optimism and over-pessimism. During an economic boom, businesspeople project the rapid expansion of the economy (and of the demand for their products) to continue. They respond to these favorable projections of future demand by increasing their production capacity through high levels of investment in new capital. This high spending then fuels the expansion, raising demand for the products of other firms and encouraging their optimism. (Recall that output is determined by aggregate demand in Keynes’s system.)
Because these optimistic expectations eventually run ahead of the economy’s ability to sustain the expansion, disappointment is inevitable. When the economy begins to turn downward, many firms find that they have substantial excess capacity, both because demand is now falling and because their high rates of investment have left them with the capacity to produce an unrealistically high volume of output. Faced with this excess capacity, firms stop investing, which lowers aggregate demand and accentuates the downward pressure on the economy. As demand and output decline, firms become even more pessimistic, keeping investment near zero during the contraction phase of the cycle. The cycle eventually starts back upward when firms in some industries find their capital stocks depreciated to the extent that they need to buy some new capital goods to sustain their (low) current levels of production. This initial trickle of investment starts aggregate demand on the road to recovery. Optimism gradually begins to replace pessimism, and the expansion phase of the next cycle begins