2.2.3 - Investment Flashcards
What is the formula for aggregate demand?
C + I + G + (X - M)
What are the main factors influencing planned investment spending by businesses?
There’s 4
Name 2
- Actual & expected demand for goods & services
- Expected profits and business taxes
- Interest rates + availability of business finance
- Business confidence i.e. animal spirits
What are animal spirits?
John Maynard Keynes coined the notion of animal spirits which refers to a mix of confidence, trust, mood and expectations.
When confidence is low, individuals save more, businesses save more too and, because demand and profits are lower than expected, they cut back on production and perhaps postpone or cancel capital investment projects.
Higher saving and reduced investment both reduce demand and incomes in the circular flow causing an economic contraction – this is called the “paradox of thrift”.
When does planned investment tend to rise?
Planned investment tends to rise when firms expect rising demand and have limited spare capacity to supply goods and services.
How can the government lift investment?
Government can lift investment by lowering corporation tax or offering other tax incentives as part of their fiscal policy.
What is gross investment?
This is spending on capital assets
such as buildings, machinery and equipment
What is net investment?
This is gross investment less depreciation and replacement costs. For example, a firm replaces a fleet of 10 cars, buying 12 new cars. The net investment is 2 cars.
What is investment in economics?
This would be regarded as saving.
In economics, investment is only concerned by firms with the aim of improving capital in terms of quantity, quality or efficiency.
Name 2 out of the 7 influences investment
- 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
How do animal spirits affect investment?
John Maynard Keynes coined the term ‘animal spirits’ to refer to the collective mood of investors. When this is strong, aggregate demand increases leading to greater capital investment.
AD = C + I + G + (X - M)
How do interest rates affect investment?
Interest rates are the cost of borrowing or the reward of saving. Lower interest rates make investment projects less costly and normally help to stimulate investment.
What’s the definition for economic growth?
The increase in the real value of goods and services produced in a country or area as measured by the annual percentage rate.
What’s one evaluation point that can be used for interest rates?
What are animal spritis?
The state of confidence or pessimism held by consumers of businesses.
What is the accelerator effect?
The accelerator effect happens when an increase in national income (GDP) results in a proportionately larger rise in capital investment spending.
