2.2.3 Investment Flashcards
define investment
expenditure undertaken by firms to add to the capital stock in the economy
what is capital stock, giving examples
used to produce output e.g robotics, infrastructure, software
what are the three types of capital investment
increasing efficiency ie new machinery with increases productivity
cost cutting ie machinery which replaces workers
research and development - ie innovation
what is gross investment
spending on capital assets such as buildings, machinery and equipment. this increases the productive capacity of the economy leading to potential economic growth
what is net investment
the gross investment minus depreciation and investment costs
considered more useful when measuring the productive potential of an economy
what is depreciation
accounts for the fall in value of assets - capital loses value as it wears out and becomes less efficient
what are the seven factors affecting the level of investment
rate of economic growth
business confidence
mood of investors
demand for exports
interest rates
access to credit
government regulations
explain how the rate of economic growth affects the level of investment
the faster the pace of economic growth, the sooner capital equipment will wear out or require replacement, so investment increases
the accelerator affect happens when an increase in national income (GDP) results in a proportionally larger rise in capital investment spending - want to meet demand
explain how business confidence affects the level of investment
if firms are confident in future economic prospects and the likelihood of consumption increasing, they are more likely to invest in capital projects
explain how the mood of investors affects the level of investment
John Maynard Keynes coined the term “animal spirits” to refer to the collective mood of investors
when this is strong, AD increases leading to greater capital investment
explain how demand for exports affects the level of investment
this will encourage firms to invest in capital assets in order to increase capacity to meet demand from overseas consumers
explain how interest rates affects the level of investment
lower interest rates makes investment projects less costly (lower cost of borrowing) and normally help to stimulate investment
explain how access to credit affects the level of investment
businesses rely on financial institutions to provide access to liquidity
the Business Bank was set up in 2012 to provide finance for businesses
this was particularly significant as the Credit Crunch severely hit the liquidity of UK businesses
explain how Government regulations affect the level of investment
businesses may be able to take advantage of government grants (subsidies) to complement and help to finance their own investments
this often applies to new start-up businesses or businesses located in an area of social deprivation
by reducing rules and regulations the government makes it easier for firms to invest in capital assets ie reducing bureaucracy
