2.2.3 + 2.2.4 + 2.2.5 Flashcards
What is investment?
- Spending on capital goods including plant & machinery and infrastructure.
What are capital goods
- goods used to produce other goods
Difference between gross and net investment
• Gross Investment: Total investment on new capital inputs
• Net Investment: Net investment is gross investment adjusted for capital consumption (depreciation)
o Some new investment is needed each year to replace worn out machinery, if gross investment in a given year is higher than capital consumption, net investment will be positive, and the size of an economy’s capital stock will grow.
Factors Influencing Business Investment
- Changes in business confidence
- Changes in interest rates
- Changes in technology
- Changes in business taxes
- Corporate indebtedness
- Access to credit
- Retained profit/ dynamic efficiency
Animal Sprits
- Keynes coined the notion of animal spirits which refers to a mix of confidence, trust, mood and expectations.
- Animal spirits fluctuate quickly as populations of people and the business community change their thinking.
What happens when consumer confidence low
Individuals and firms save more - they cut back on production and perhaps postpone or cancel capital investment projects. Economic activity suffers.
Evaluate this point : Investment is an injection into the circular flow of income – it is a component of AD
Some of the capital goods might be imported – this is a leakage from the circular flow
Also increase in capital goods could replace human labour, people may lose jobs (may need benefits - more gov spending)
Evaluate this point: New capital can aid productivity and creates additional capacity to supply
Might be a lengthy time lag between workers getting more capital and productivity rising
Evaluate this point: Investment will support a country’s competitiveness and therefore improve the trade balance in goods and services
Many other factors affect competitiveness – including the level of the exchange rate
The accelerator effect definition
accelerator effect is a relationship between planned investment and the rate of change of national income
How does he accelerator effect work
- Consider an industry where demand is rising quickly, firms may respond initially by using their existing capacity more intensively or running down stocks of finished products.
• If expect high demand will sustain = increase spending on capital goods in order to increase their supply capacity.
• causes a positive accelerator effect – where a given change in demand for consumer goods and services = bigger percentage change in demand for capital goods.
Economic significance of infrastructure
- Potentially high multiplier effects from multi-billion investment projects – increases AD and jobs.
- Lack of infrastructure may discourage FDI.
- Increases the capital stock / productive potential
Significance of government spending
- key component of AD
- has a regional economic impact
- important in providing public and merit goods
- can help achieve greater equity in society
Government revenue and the economic (trade or business) cycle
Gdp rise in boom/recovery =
- more in work = more income = more tax revenue
• business profit rise = more corporation tax
• more spending on goods and services = more VAT/Sales taxes
• people buy more assets = higher price of them = more revenue from capital gains taxes
Why will the government likely spend less when the economy is expanding
- less people out of work, = less spending on unemployment benefits.
•households see pay increases, so less spent on benefits.
• Some will choose to pay for private healthcare/ education, so there may be less spending needed on the NHS or schools.
• Crime levels lower when economy growing, = less spending on the police
