2.2.3 Investment Flashcards
Investment
when business buy capital stock (anything that adds to production of an economy since it allows businesses to produce more)
Gross investment
- accounts for capital before depreciation is taken into account
Net investment
accounts for capital taking depreciation into account
Factors affecting investment
- interest rates
- access to credit
- the rate of economic growth
- business expectations and confidence (Keynes & “animal spirit”)
- demand for exports
- influence of government and regulations
How does interest rate affect investment?
- low interest rates = loans are cheaper = more money to spend on I = AD up - low interest = more consumption = more demand for g/s = more need to I
Keynes “animal spirits”:
referred to a particular sort of confidence “naive optimism”, where entrepreneurs, encouraged by rising markets, take too many risks
How does access to credit rate affect investment?
credit crunch = banks are less willing to lend to firms
Factors affecting investment (influence of govt and regulation) example
Increased regulation = decreased profit incentive for I/FDI
- E.g Switzerland has low corporation tax
Factors affecting investment (confidence) example
E.g Global Financial crisis
Advantages of high investment
- injection into circular flow
- new capital
- creates extra demand
- increased competitiveness
Advantages of high investment (injection) evaluation
Some investment (capital) might be imported -a leakage from the circular flow
Advantages of high investment (new capital)
New capital = increased productivity & creates additional capacity to supply
Advantages of high investment (new capital) evaluation
It might be a length time lag between workers getting more capital and productivity rising
Advantages of high investment (creates extra demand)
-it creates extra demand in investment goods industries and can lead to strong multiplier effects on the levels of GDP
Advantages of high investment (creates extra demand) evaluation
Some capital investment replaces labour & so = short term unemployment
Advantages of high investment (increased competitiveness)
- increased competitiveness so increased trade balance
Advantages of high investment (increased competitiveness) evaluation
There are other factors influencing competitiveness e.g exchange rates
How does business confidence affect investment?
low confidence after financial crisis = business were worried about keeping their businesses going = they felt pessimistic about the prospects of returns from expansion = less likely to invest in growing their business
Multiplier effect
Multiplier effect is where an initial change in
aggregate demand can have a greater final impact on
equilibrium national income (1)
• Injection of money from investment goes round the
circular flow multiple times/knock-on effects/further
effects
One person’s spending is another person’s income
