2.2.3: Investment

Question 1

What is investment?

Answer 1

Investment is the addition/ purchase of capital goods/ stock in the economy eg machinery and factories

Question 2

What is gross investment?

Answer 2

Measures investment before depreciation (loss of value in assets)

Question 3

What is net investment?

Answer 3

Measures investment after depreciation

Question 4

What are the main influences on investment?

Answer 4

-Interest ratees
- Economic Growth (the accelerator theory)
- Costs
Expectations and confidence
-The world economy
- Access to credit
- Retained Profit

Question 5

How do interest rates influence investment?

Answer 5

As most investments are done through borrowing, high interest rates mean borrowing is more expensive, which means there could be a decrease in investment.

Question 6

How does economic growth (accelerator theory) influence investment?

Answer 6

Economic growth means rise in real GDP/ income
- this requires more capital goods to produce more goods and services.
- therefore, more investment from businesses will happen

Question 7

How do costs influence investment?

Answer 7

Rising costs could mean less investments as it is more expensive to purchase/ invest in capital goods

Question 8

How do expectations and confidence (animal spirits) influence investment?

Answer 8

When businesses are confident about the future and expect future growth, investment will increase as they want to prepare for the future.
- If they don’t have confidence in the future, there will be less investment.

Question 9

How does the World Economy influence investment?

Answer 9

• If other economies are doing well, the UK will be exporting more goods to them, meaning UK businesses can increase investment.
• (emerging economies includes BRIS & MINT countries)

Question 10

How does access to credit influence investment?

Answer 10

• Credit constraints mean firms are unable to pursue attract investment opportunities, therefore less investment.

Question 11

How does retained profit influence investment?

Answer 11

• The retention ratio helps investors determine how much money a company is keeping to reinvest in the company’s operation. If a company pays all of its retained earnings out as dividends or does not reinvest back into the business, earnings growth might suffer