2.2.3 Investment (I) ✅ Flashcards
What is investment?
Spending of money on capital goods by firms in order to increase their productive possibility (capacity).
How do you distinct gross and net investment? Which one do you see economic growth?
Gross investment is amount spent of capital goods including depreciated ones, net investment however is minus depreciation.
Net investment shows economic growth.
What can influence investment?
- rate of economic growth.
- business expectations and confidence.
- Keynes and ‘animal spirits’
- demand for exports
- interest rates
- access to credit
- influence of gov and regulations
Overall what causes investment?
Profit maximisation.
Explain how the rate of econ growth can effect investment?
Acceleration in econ growth can incentivise investment to increase capacity to meet demand (max profit).
How can business expectations and confidence influence investment?
Marginal propensity to invest increases when firms expect increase in demand.
How does the Keynes and animal “spirits” effect investment?
Animal spirit is how confidence influences actions. Eg during econ growth this is high so firms are more likely to take risks.
How does demand for exports influence investment?
Increase export demand increases domestic demand.
Investment needed to expand capacity and meet higher demands.
How does interest rates influence investment?
Loans are how firms invest.
Higher = costs more to invest (thus need more confidence).
Lower = opposite.
How does access to credit influence investment? Where is harder access found?
Easy access to loanable funds increases levels of investment.
Harder access holds back investment.
In developing countries or in recessions.
How does gov influence investment?
Intervention = eg subsidies aids investment
Regulations = decreases investment (higher cost of production+less profit).
