2.2.3 Investment

Question 1

What is gross investment?

Answer 1

Gross investment is the amount of investment carried out and ignores the level of depreciation

Question 2

What is net investment?

Answer 2

Net investment= gross investment – depreciation

Question 3

UK depreciation accounts for about ? of gross investment

Answer 3

75%

Question 4

Rate of economic growth on investment: (3)

Answer 4

• In a growing economy firms will have more confidence to invest
• Higher demand would lead to a higher return rate on investment
• If growth is high, firms will be making more revenue due to higher rates of consumer spending. This means they have more profits available to invest.

Question 5

What is the term ‘animal spritis’?

Answer 5

Keynes coined the term animal spirits when describing instincts and emotions of human behaviour, which drives the level of confidence in an economy

Question 6

Business expectations and confidence - ‘Animal spirits’ on investment:

Answer 6

• When businesses are confident about the future and expect future growth, investment will increase as they want to prepare for the future
• If they are fearful of the future, then they will not invest money in new ideas or machinery

Question 7

Business expectations and confidence on investment:

Answer 7

• ​When businesses are confident about the future and expect future growth, investment will increase as they want to prepare for the future.
• If they are fearful of the future, then they will not invest money in new ideas or machinery

Question 8

Demand for exports on investment: (2)

Answer 8

• If world economy is booming, demand for exports is likely to increase and therefore firms’ investment will increase to cope with extra demand
• this will have a knock-on effect

Question 9

Interest rates on investment: (3)

Answer 9

• Investment increases as interest rates falls. This means that the cost of borrowing is less and the return to lending is higher
• The higher interest rates are, the greater the opportunity cost of not saving the money.
• High interest rates might make firms expect a fall in consumer spending, which is likely to discourage investment

Question 10

Influence of government on investment: (2)

Answer 10

• Lower taxes (corporation tax) means firms keep more profits, which could encourage investment
• Government subsidies or tax breaks could encourage investment

Question 11

Access to credit on investment:

Answer 11

• If banks and lenders are unwilling to lend, such as shortly after the financial crisis when banks became more risk averse, firms will find it harder to gain access to credit, so it is either more expensive or not possible to gain the funds for investment