To understand what determines the level of investment we must first be certain what the term means. Unfortunately investment is one of those words which has developed a specific, but not always exact, meaning in economic theory. For investment to occur capital must have been produced. What precisely constitutes capital is a matter of some debate, which we will not go into here. For the purpose of understanding how investment affects the circular flow of income, capital will be taken as meaning anything that aids the production process other than land, labour and enterprise. Investment will therefore have taken place when a producer buys a machine, or raw material, or builds up stocks, or rents a factory, but it will not have taken place when he pays his labour force, nor when he distributes profits to the shareholders, nor when he purchases a piece of land.
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