The Relationship Between Actual Investments and Planned Investments

While discussion about actual investments and planned investments often comes up deep in the study of macroeconomics or experimental economics, these concepts come with a fairly unexpected twist: At the most basic level, they're pretty much exactly what they sound like. Of course, that doesn't mean that there aren't layers of subtlety to explore. By understanding the relationship between these two principles, economists gain valuable insight about the future state of the economy.

Think of planned investments as a firm or business sector's annual portfolio game plan or, put formally, the amount of investment they plan to undertake during a given period of time (typically, a fiscal year). Planned investment is the sum of everything a firm intends to invest, including the additions it plans to add to its cache of capital goods and its stock.

Planned investment revolves around the idea of consumption. Similar to an individual's disposable income, consumption is the portion of a firm's expenditures that makes up the largest share of its planned investments.

Didn't someone once say something about the best-laid plans of mice and men? Because those plans often go awry, the investing world has created the concept of actual investments, which is the amount of investment a firm actually undertakes during the same time span of its planned investments, when all is said and done.

Naturally, planned investments shift as expectations for annual profits shift, as interest rates fluctuate or as production capacity changes. These are just a few reasons actual investments may differ from planned investments. Another common reason for the disparity between planned and actual investments is unplanned changes in inventory. No matter how the plan changes, the sum total of actual investments always includes both planned and unplanned investments.

Just like the concepts themselves, the connection between planned and actual investments is fairly straightforward. In fact, it boils down to a simple formula: Actual investment is equal to planned investment plus unplanned changes in inventory.

Actual and planned investments play a key role in the Keynesian economic theory, which focuses on total economic spending and how it affects both output and inflation. The ideal relationship between planned and actual investments would be complete balance, known as macroeconomic equilibrium. This is the state in which planned investment is exactly equal to actual investment.

At its core, the relationship between planned investments and actual investments not only indicates the future shape of national and international economies, but it also helps you understand the relationship between your firm's income and its expenditures. When it comes to investing, it doesn't get much more foundational than that.