2.2.3 Investment (I) Flashcards
What is investment?
Investment is the total spending on capital goods by firms.
What does investment help?
Investment helps to increase the capacity (production possibilities) of an economy, Increased capacity = increased potential economic growth.
What is depreciation?
Depreciation is the decrease in monetary value of a capital good (asset) over time. Replacing old capital goods does not necessarily increase capacity.
What is gross investment?
Gross investment is the total amount of spending on capital goods. This spending includes replacing old capital goods and purchasing new capital goods.
What is net investment?
Net investment is the gross investment - depreciation. This metric provides information on the addition of new capital goods to an economy.
What are the four influences on the decision to invest for firms?
/Rate of economic growth
/Interest rates
/Demand for exports
/Influence of government and regulations
Explain how rate of economic growth is an influence on investing?
Increasing growth sends a signal that higher output will generate higher profits. The faster the economic growth, the greater the urgency to invest.
Explain how interest rates is an influence on investing?
Most investment by firms is financed through business loans. Decreasing interest rates encourage investment. There is a mostly inverse relationship between investment and interest rates.
Explain how demand for exports is an influence on investing?
If demand for exports increases, firms will likely invest to meet the global demand. Demand for exports can increase if the exchange rate depreciates. Goods/services now seem cheaper to foreigners.
Explain how influence of government and regulations is an influence on investing?
Government intervention can increase investment e.g. subsidies. Government regulation can decrease investment (it raises costs of production for firms and can lower profits).
