Which of the following best describes the difference between economic and financial investments?

• A. Economic investment is made by individuals, whereas financial investment is made by governments.
• B. Economic investment refers to the purchase of new capital goods, while financial investment involves buying financial assets like stocks and bonds.
• C. Economic investment always leads to an increase in money supply, while financial investment does not affect the money supply.
• D. Economic investment is only concerned with short-term profits, while financial investment focuses on long-term growth.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of economic investment. Economic investment refers to the purchase or creation of new capital goods, such as machinery, buildings, or equipment, which are used to produce goods and services in the future. It contributes directly to the productive capacity of the economy.
2. Step 2: Understand the concept of financial investment. Financial investment involves buying financial assets like stocks, bonds, or other securities. These investments represent claims on future income or assets but do not directly create new capital goods.
3. Step 3: Compare the two types of investments based on their impact. Economic investment increases the stock of physical capital and thus can lead to economic growth, while financial investment primarily involves the transfer of ownership of existing assets and does not directly increase productive capacity.
4. Step 4: Analyze the options given in the problem. Identify which statement correctly distinguishes economic investment (purchase of new capital goods) from financial investment (buying financial assets).
5. Step 5: Conclude that the correct description is that economic investment refers to the purchase of new capital goods, while financial investment involves buying financial assets like stocks and bonds.