Final answer:
Capital investment refers to the expenditure by business entities on assets such as producer's durable equipment, nonresidential structures, changes in inventories, and residential structures to increase operating capacity and economic growth potential.
Step-by-step explanation:
Capital investment includes the outlay of funds by a firm to acquire physical assets that can be used to increase its operating capacity and, hence, its potential to earn profits. The purchase of new capital goods comprises several forms of investment, such as:
- Producer's durable equipment and software - These are machinery and technological tools that businesses use over long periods.
- Nonresidential structures - This category includes buildings for commercial uses like factories, offices, and retail stores.
- Changes in inventories - This refers to the goods that businesses hold in stock and changes therein, which represent an investment necessary to match supply with consumer demand.
- Residential structures - Such as single-family homes, townhouses, and apartment buildings, represent a different type of investment undertaken by households.
These investments are crucial during times of economic expansion when firms experience higher profits and increased consumer demand. In such phases, firms often go to financial markets to raise funds for these investments, which are a fundamental component needed to sustain economic growth.