Investment spending has a tendency to fall and rise on numerous occasions, thus said to be unstable due to several reasons. Consumption is complementary to saving or investing; hence if a household does not consume, it invests. However, it is easier to forgo investment than consumption which at most times is compulsory. Some of the reasons for the fluctuation of the amount invested include irregularity of innovation, the durability of capital goods, and the variability of profits and expectations.
Irregularity of innovation refers to introducing new products and production methods that trigger a change in consumption, investment, employment, and outputs. The change may be widely spread in the economy, causing fluctuations. However, the economy may go back to normal or decline after the absorption of the innovation. Capital goods form one of the four factors of production. More durable goods require a huge amount of investment to acquire. Durability affects the adoption of new technology, the decision of an entrepreneur to buy or rent, and buying between new and used capital goods.
Households with constrained finances are likely to rent or buy used goods hence required to spend more on repair and maintenance. Variability of profits and expectation is a significant factor that affects the stability of investments. Since investing involves taking a risk, households may shun the practice when there are predictable fluctuations of factors affecting the economy, such as interest rates, inflation, and political and economic instability, among others.
