Question

Suppose that the city of New York issues bonds to raise money to pay for a new tunnel linking New Jersey and Manhattan. An investor named Susan buys one of the bonds on the same day that the city of New York pays a contractor for completing the first stage of construction. Is Susan making an economic or a financial investment? What about the city of New York?

Short answer

Susan is making a financial investment. The city of New York is making an economic investment.

Step-by-step solution

Step 1. Economic and financial investment

Economic investment refers to either adding to the capital stocks or replacing the capital stocks. New York City, paying the contractor for the tunnel's construction, will build infrastructure for the development. It can further help in developing businesses, institutions nearby that will facilitate growth. Hence, it is an economic investment.

Step 2. Financial investment

The financial investment can involve either financial assets or real assets. Susan’s investment in bonds is a financial asset because it will give her only financial returns and not add to capital stock. Capita stock is something that helps to increase the productive capacity.