2.2.3- Investment Flashcards
What is investment?
The addition of capital stock to the economy
What is gross investment?
The amount of investment carried out that ignores the level of depreciation
What is net investment?
The actual addition of the capital stock of an economy after depreciation
What are the influences on investment?
-rate of economic growth
-animal spirits
-demand for exports
-interest rates
-influence of government
-access to credit
-technological change
-costs
How does the rate of economic growth influence investment?
-if growth is high firms will need to increase their investment to produce more goods, and will have more profit to invest
-if the economy is shrinking due to a recession, firms won’t have to replace all their investment, and will have a smaller rate of return on investment, so investment will fall
What is the accelerator theory?
The relationship between planned capital investment and the rate of change of national income. If an industry has rising demand, they may use their existing capacity, but if demand is expected to be sustained, they may increase depending on investment at a greater rate than the change in income because they anticipate the level of demand will reach that
What is the equation for investment over a period of time?
Investment= capital output ratio x change in real income
How does animal spirits influence investment?
-when confidence is high, investment will increase to prepare for the expected future growth
-Keynes used the term animal spirits to describe the feelings of owners on whether their investment would be profitable
How does demand for exports influence investment?
-if the world economy is booming, demand will increase therefore investment will increase
How do interest rates influence investment?
-high interest rates mean that borrowing is more expensive, so less profit can be made on investments
-also investing using retained profits willl decrease as there is more incentive to save and an increase opportunity cost
How does the influence of government influence investment?
- lower tax means firms keep more profit which could encourage investment
- subsidies or tax breaks could encourage investment
- high levels of regulation would discourage investment as it increases the cost and time taken to invest
How does access to credit influence investment?
- if access is reduced, it becomes more expensive or not possible to gain funds for investment
-in recessions it’s harder to access credit as risks are higher
-the availability of funds is dependant on the level of saving in the economy
How does technological change influence investment?
- improvements in technology will improve production which will increase the level of profitability, meaning the investment has a better prospect of success
-change also means businesses need to invest to keep up with the best technology
How do costs influence investment?
- increases in costs of any capital project increases the level of risk that you are taking, and therefore leads to lower levels of investment
-increases in costs of raw materials or wages will reduce profitability, so they have less money to invest
What does a large level of spare capacity mean for investment?
The greater the level of spare capacity the less incentive there is to invest
