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Investment vs Consumption

Investment and consumption both decrease your fund. Both are the application of your saved cash. Both provide you happiness and satisfaction. Without both, you can not survive in the society.  But there are many difference between investment and consumption, if we go to deep of both through finance and macro economics books. Following are main difference between investment and consumption.

Investment vs Consumption

Basis of Difference


1. Definition


 Investment is that use of fund which provides us the return and long term benefits.

 Consumption is that use of our fund which provides us short term satisfaction without any return and long term benefits.

2. Example


 We start our accounting firm by buying computer, furniture and a shop with $ 100000.

 After starting our accounting firm, we feel happy and give party to our friends. Party expenses of $ 1000 is our consumption

3. Propensity



 There is direct relationship between income and investment. Trend of investment will increase, if your income will increase.

 There is no direct relation between income and consumption. By increasing income, risk level will increase and you will surely decrease your consumption and invest money in some secure earning schemes.

4. Factors 









  There are many following factors which affect the level of investment.

a) Innovation - innovation needs more investment.

b) Expectations of high profit - This will increase your investment.

b) Rate of population growth - For making roads, building, schools need more investment.

There are many following factors which affect the level of investment.

a) Economic independence - for becoming independent, you have to decrease your consumption.
b) Status or Ego - for showing status or ego in the society, rich people consume waste products.
c) Decrease in the prices - If prices are decreased, at that time, you will increase consumption. For example, living rent of hotel in hill station will be less in winter. So, you will enjoy in hill station in winter.

5. Average Propensity

 - Total Investment / Total income

 - Total consumption / Total income

6.  Types 

a)  Induced Investment
b) Autonomous Investment

 a) Linear consumption
b) Non -linear consumption

7. Society Benefits 







  Suppose, you need vehicle for carry your products from one place to other. In market, you can buy a simple vehicle with $10000 which will satisfy your business need, will be your investment. Because you want to give society benefits by your each $ of investment.

 Suppose,  you do not buy $ 10000 value vehicle but you buy just branded vehicle with $ 40000 because you are affected from its advertising. $ 30000 in it will be your consumption because same quality vehicle, you can buy $ 10000 and rest money can be used for society benefits. But you have wasted your money in the form of your consumption.

8. Strategy

 Provide sufficient amount of return is best way to increase investment in specific project.

 More and more advertising online, offline may affect the level of consumption. This is main strategy to increase the consumption of consumers.

9. Govt. Role 



 Govt. wants to invest money for social welfare. For this, it makes govt. schools, govt. colleges, govt. hospitals, govt. parks etc. All the investment of govt.

Govt. wants to grow our business. But business can not grow without the consumption of society. So, govt. makes its tax system more progress. Burden of this tax will on riches and not on middle or poor society. With this, poor society will buy necessary goods and consume for satisfying basics needs.


10. On the Basis of My Personal Thinking

Every investment should be for other needy's help. Suppose, I buy a new computer. But my motive is to help needy through my computer. If I buy inverter and battery. Its aim should be to provide better service to needy regularly. My consumption is to drink food and eat balance food for healthy life. I do not like Fridge and AC and other useless luxuries consumption. It may be your financial investment but in my sense, it is just useless consumption. Because both help to decrease your health. Health is real wealth. So, consumption should be only for physical maintenance and investment should be for other help. I give the example of Krishna of Mahabharata. In Mahabharata, we see that Krishna became the driver of Arjun. Even after king of Mathura, he accepted this duty. He had the power to buy millions of drivers for Arjun. But, he did not trust in useless consumption. During the time of war, he did the service of his horses by himself. He had power to buy millions of servant for serving his horses but he did not want to waste his money in such useless consumption. So, we have to follow that great Shri Krishna before taking any decision regarding investment or consumption. 

Related : Bonds Vs Stock 




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Accounting Education: Investment vs Consumption
Investment vs Consumption
Accounting Education
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