2.2.3-5 Flashcards
What is investment?
- The addition to capital stock to the economy. e.g machines and factories used to produce other goods and services. Only seen as an investment if new products are created. NOT SHARES
What is Gross investment?
- The amount of investment carried out and ignores depreciation.
What is net investment?
Gross investment - value of depriciation
Show a example of net investment and Gross investment?
- If a firm bought 5 machines that is the gross investment. The net investment is the value of 5 machines minus the 2 machines you got rid of.
What are the influences of investment?
- Rate of economic growth
- Businesses expectations and confidence
- Demand for exports
- Interest rates
- Influence of government and regulations
- Access to credit
- Retained profits
How is the rate of economic growth an influence on investment?
- In a growing economy there are higher levels of investment as they are more confident on investments and leads to a higher return on investment. - If more products are demanded more investment is needed.
- If less products are needed firms will keep old investments
How does business expectation and confidence affect investment?
- If businesses are confident about future they will invest more as they want to prepare for future.
- If they are fearful of future they will not invest in future.
- Animal spirits said this to describe if their investment will be profitable
How does demand for exports affect investment?
- If world economy is increasing, demand for exports is likely to increase and therefore firms increase investment.
How does interest rates effect investment?
- Higher interest rates mean borrowing is expensive and need to be confident of profits to cover borrowing
What influence does government spending play in AD?
- Big part through spending. They spend money on defence, eduction, NHS and etc. Rise in government spending increases taxes. If both increase no overall increase in demand as people have less disposable income
What are some influences on government expenditure?
- Trade cycle
- Fiscal policy
- Age distribution of the population
How does trade cycle influence government expedenture?
- Decisions over government expenditure have to be made to manage AD. Therefore regulate trade cycle.
- In recession they increase spending to reduce unemployment.
- Also have to spend more on unemployment benefits
- During booms they decrease spending to decrease demand and reduce inflation
How does fiscal policy influence government expenditure?
- Government spending is fixed from year to year. Schools must be funded and pensions must be paid.
- However they can vary what they spend each other and this is set out in their budget.
- FP is the decisions about government spending and taxes and depend on priorities of government.
How does Age distribution of the population effect government expenditure?
- Increased ageing population leads to more government spending on pensions and social care. Whilst young populations leads to it spent on education. More dependents more spending of government.
What is Net trade?
- Total exports - Total imports
What are some influences on net trade balence?
- Real income
- Exchange rates
- State of world economy
- Prices
- Non price factors
How does Real income effect net trade balence?
- When real income in UK is high there is a high import rate and and demands of goods and services in UK cant meet their needs. Net trade decreases. However if there is a an increase in real income due to export led growth than net trade will decrease.
How does exchange rates effect net trade balence?
- A strong pound makes imports cheap and exports not because it costs foreigners more to buy pounds with their local currency. Imports will increase and exports decrease. Depends on elasticity of imports and exports. If imports are elastic a rise in price will cause a large fall in price. Whereas inelastic imports causes price to rise as only a small price fall.
How does state of world economy affect net trade balance?
- If UK’s main export country is doing well than UK exports are likely to rise so an increase in net trade. The SOWE is dependent on how well their main export countries are doing.
How does non price factors affect net trade balence?
- the two factors which affect this are quality and design and marketing. If UK goods and services are at higher quality exports will be higher and imports will decrease as people will buy British goods.
How does price affect net trade balance?
- Higher price of UK goods and services will mean the goods are less competitive compared to international goods. Value of exports will decrease .
