Question

Your friend claims that he has invested in stocks and bonds. As a budding economist, would you agree/disagree with your friend's claim?

Answer 1

Even though purchase of stock and bonds is called "investment" in Finance, in economic sense, stock and bond purchase is not considered as an investment.

Purchase of stocks and bonds are mere transfer of ownership of existing assets from one asset-holder to another. This does not create any new assets. The Investment component of GDP in economic sense includes residential investment, non-residential (business fixed) investment and addition to business inventory. Stocks, bonds and other financial assets do not fall into any of these categories, therefore they are not treated as investment as they do not contribute to the country's GDP.