Difference between Fixed Investment and Inventory Investment

Difference between Fixed Investment and Inventory Investment

The basic difference between fixed investment and inventory investment is the type of goods on which investment is to be made. Firstly, Fixed investment refers to expenditure on investment in capital goods. On the contrast, inventory investment refers to the expenditure incurred on investment in stock. 

To know the difference between these two, we must clear the meaning of these terms:

Meaning of Fixed Investment:-

It refers to the increase in the stock of fixed assets of the producers during a year. In other words, it can be described as the expenditure incurred by producers on purchase of long term assets or capital goods during the year. For example, Plant and machinery, Furniture and Building etc. 

It can be calculated as:

Fixed investment during the year = Stock of fixed assets at the end of the year – Stock of fixed assets in beginning of the year

For example, 

Let’s assume, a producer has a stock of 20 machines at the beginning of year i.e. 1st Jan 2020. On 31st December 2020, he has a stock of 35 machines. Thus, the fixed assets stock of producer is increased by 15 machines during the year.

Therefore, fixed investment during the year 2020 = 15 machines.

Due to this, fixed investment is also known as Fixed capital formation. Thus, It means the increase in capital in terms of fixed assets which are used in the process of production for several years. 

Meaning of Inventory Investment:-

It refers to the change in the stock of finished, semi-finished and raw material during a year. Here, the finished goods refer to the final goods ready to sale or unsold. And, Semi-finished goods include goods which are in the process of production. Thus, The stock of these goods is known as Inventory stock. It keeps on varying with the passage of time. Hence, the change inventory stock during the year is known as inventory investment of producers.

It can be calculated as:

Inventory investment during the year = Inventory stock at the end of the year – Inventory stock at the beginning of the year.

For example,

Let’s assume the producer has 1,25,000 units of inventory stock including finished, semi-finished goods and raw material at the beginning of year i.e. 1st Jan 2020. On 31st December 2020, he has 2,25,000 units of inventory stock with him. Thus, the inventory stock of producer is increased by 1,00,000 units.

Therefore,

Inventory stock during the year = 1,00,000 units.

Chart of Difference between Fixed investment and inventory investment:

Basis of Difference Fixed Investment Inventory Investment
Meaning

It refers to expenditure incurred on the purchase of fixed assets or capital goods.

It refers to expenditure incurred on the purchase of raw material, semi-finished or finished goods.
Purpose Here, the purpose is to continue further production. Here, the purpose is to meet the demands of consumers in case of shortage.

Can be known as

It can also be known as Capital investment. It can also be known as Working Capital investment.

Considered as

Here, the investment can be considered as expenditure on long term assets. And, this investment can be considered as expenditure on income yielding short term assets.

Resale of assets

In this type of investment, the assets are not meant to be resold at any period of time. Here, the inventory is not meant to be resold immediately but stays in stock to raise inventory level.

Calculation

The stock of fixed assets at the end of the year – Stock of fixed assets in beginning of the year Inventory stock at the end of the year – Inventory stock at the beginning of the year.

Significance

In short, It leads to a higher rate of economic growth. Generally, It avoids the uncertainties related to price and availability of raw material.


Download the chart:-

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Conclusion:

Thus, these both investments are essential for any business enterprise. As one is required for further production. And, other is required to make profits.

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