What is the difference between financial investment and real investment? Why is only one included in GDP?
Answer (2)
Real investment refers to the purchase of physical assets that are used in the production of goods and services. This includes buildings, machines, tools, and even new housing. On the other hand, financial investment means buying financial assets like stocks, bonds, or mutual funds, usually for earning profit or saving wealth.Only real investment is included in GDP because it results in actual production. For example, when a business in Quezon City builds a factory or a family in Cavite buys a new house, this is real investment. It leads to construction activity, job creation, and increased capacity to produce in the future.Financial investment, like buying shares in Jollibee Foods Corporation or investing in government bonds, is considered a form of saving or wealth transfer. No new goods or services are created in this process—it’s just a change in ownership of financial assets. That’s why it’s not part of GDP.Let’s take an example. If Maria buys a second-hand car using her savings, it’s not counted in GDP because the car was already produced in the past. But if a company buys a new delivery van to transport goods, that is counted because it’s a new addition to production.Understanding this difference is important for students and future entrepreneurs. While both kinds of investment are useful—one for growing the economy, the other for managing personal finances—GDP only measures production, and real investment is its key component.
Financial investment refers to the purchase of financial assets like stocks, bonds, or mutual funds. It does not involve the production of new goods or services.Real investment, on the other hand, involves spending on physical assets like machinery, buildings, or infrastructure—things that contribute to production.Only real investment is included in GDP because GDP measures the value of goods and services produced in an economy. Financial investments are just transfers of ownership and do not reflect current production.
