2.2.3 - Investment Flashcards
What is investment?
The purchase of capital goods to produce goods and services.
What is gross investment?
The total amount of investment within an economy.
How do you calculate net investment?
Gross investment - depreciation
What impact does positive net investment have on AD and the PPF?
Shifts both the PPF and AD to the right.
What are the 5 factors affecting investment?
- the accelerator
- interest rates
- animal spirits
- taxes
- government regulation
How does the accelerator impact investment?
Investment is demand induced. Insufficient capacity stimulates investment by firms to increase supply to reach higher levels of demand.
How do interest rates affect investment?
Higher interest rates reduce the level of investment because:
- higher cost of borrowing reduces rate of return and makes projects unprofitable
- increases the opportunity cost of using funds for investment
- reduced business confidence
- resultant economic contraction generates negative accelerator
How do animal spirits affect investment?
A term used by John Maynard Keynes to describe the instincts and emotions that determine human behaviour measured in terms of consumers and business confidence.
How do taxes affect investment?
Changes to corporation tax may alter the rate of return on capital employed impacting the feasibility of investments. Changes to income tax affect disposable income and the level of household demand influencing capacity decisions
How does government regulation affect investment?
Red tape increases cost of production discouraging investment.
What is the relationship between investment and the level of employment in the economy?
If firms invest in capital goods, it will increase the level of employment because more workers are needed to utilise those goods in the workplace.
Why do firms invest?
- profits
- increase capacity to meet levels of demand
- improve efficiency
- exploit economies of scale
- higher wage costs initiates substitution
- create barriers to entry
What are the impacts of investment for firms?
- improves international competitiveness
- increases profits
- may reduce employment via capital-labour substitution
How will investment affect AD?
Investment increases AD, causing it to shift to the right
How will investment affect LRAS?
Investment increases the productive capacity of the economy shifting LRAS to the right (long-run economic growth).
