2.2 - Investment

Question 1

Gross investment

Answer 1

• value of all new physical capital that is produced or purchased within an economy over a specific time period. It includes both replacement investment (to maintain existing capital) and net investment (to increase the capital stock).
  > This is the total investment in an economy without any adjustment for depreciation

Question 2

Net investment

Answer 2

• Net investment is the portion of gross investment that represents an increase in the capital stock. It is calculated by subtracting depreciation from gross investment.

Question 3

Capital Depreciation

Answer 3

Over time, capital stocks become old and machines wear out

Question 4

Influences on investment:

Answer 4

• the rate of economic growth
• business expectations and confidence
• Keynes and ‘animal spirits’
• demand for exports
• interest rates
• access to credit
• the influence of government and regulations

Question 5

Influences on Investment: Rate of Economic Growth

Answer 5

• When the economy is growing at a healthy rate, businesses are more likely to invest in new capital because they are more confident that their investments and the
  higher demand would lead to a higher return rate on the investment
  > there is increased demand which they are meeting
• Conversely, during economic downturns, investment tends to decline.

Question 6

Influences on Investment: Business Expectations and Confidence

Answer 6

Positive expectations about future economic conditions and business prospects encourage investment.
High confidence in the economy can lead to increased capital expenditures.

Question 7

Influences on Investment:
Keynes and ‘Animal Spirits’:

Answer 7

• Confidence, optimism, and entrepreneurial spirit can drive investment even when rational analysis might suggest caution.
• suggests business confidence is random and unpredictable

Question 8

Influences on Investment: Demand for Exports

Answer 8

• Strong demand for a country’s exports can boost investment, especially in export-oriented industries.
  to cope with this extra demand.
• This will have a knock-on effect and encourage other
  firms to increase their investment (so they are not out-competed)

Question 9

Influences on Investment:
Access to Credit

Answer 9

• The availability of credit, including loans and lines of credit, can impact a firm’s ability to finance investment projects.
• During credit crunches, businesses may face difficulty obtaining funds for investment.
• For example In recessions, it is usually more difficult to access credit as risks are higher
  and banks become more risk aware, fearing firms will not be able to pay the money back

Question 10

Influences on Investment: Influence of Government and Regulations

Answer 10

• Government policies, such as tax incentives and subsidies for investment, can encourage businesses to invest (they have higher profits for investment)
• Regulations can affect the ease of doing business and the attractiveness of investment.
  > highly regulated economy tends to see less investment as regulation
  increases the cost and time taken to invest, such as planning regulations

Question 11

The Accelerator

Answer 11

A change in investment will change the level of aggregate demand. But a change in demand will also change investment.