3.3 - Investment

Question 1

What is investment?

Answer 1

Investment is spending on capital goods such as new tools, machinery, and raw materials that can be used to supply other goods or services.

Question 2

What is the distinction between a consumption good and a capital good?

Answer 2

A capital good is a good that has a long-lasting productive value while a consumption good is used for leisure and does not have productive value.

Question 3

Is the statement “All investment is done by businesses” true or false?

Answer 3

False. Most investment is done by private sector businesses, but there is a substantial amount of investment done by the government and households.

Question 4

Is the UK an important destination for FDI?

Answer 4

The UK has a strong track record in securing inward investment and is a very attractive place for businesses with a strong legal system and its former EU membership which is the gateway to a large market. However, the number of inward investment projects has declined since England left the EU.

Question 5

Is the statement “All investment is the acquisition of machinery” true or false?

Answer 5

False. Machinery only comprises 15% of investment while the largest percentage is on buildings and structures.

Question 6

What impact has Brexit had on UK investment?

Answer 6

Brexit has caused a decrease in foreign investment into the UK and a decrease in investment within the UK as firms are unsure of their future sales.

Question 7

What is Gross investment?

Answer 7

Gross investment spending is total spending on new capital which is made up of two components: replacement investment and net investment.

Question 8

What is the impact of higher interest rates on investment?

Answer 8

An increase in interest rates will increase the cost of investment relative to the potential yield, potentially making some planned projects not worthwhile and resulting in decreased investment.

Question 9

What is the impact of a reduction in confidence in the economic environment on investment?

Answer 9

A reduction in business confidence and certainty will cause decreased investment as firms may postpone projects due to reduced demand.

Question 10

What is the impact of a fall in corporate profitability on investment?

Answer 10

A decrease in corporate profitability will decrease investments as firms will rely more on banks for investment and not their own internal funds.

Question 11

How can an improvement in mobile phone technology lead to a rise in investment?

Answer 11

An improvement in mobile phone technology will raise the rate of return on investment projects by making the new capital equipment more productive.

Question 12

What is the impact of a fall in wages on investment, other things being equal?

Answer 12

A fall in wages will lead to firms adopting more labor-intensive methods of production and therefore a decrease in investment.

Question 13

What is the accelerator effect?

Answer 13

The accelerator effect is when a change in demand for consumer goods causes a greater percentage change in demand for capital goods.

Question 14

What is the UK corporation tax rate and how does it compare with other countries?

Answer 14

The current UK corporation tax rate is 19% which is low compared to other countries.

Question 15

What is the connection between investment and trade competitiveness?

Answer 15

Higher investment can boost a nation’s international competitiveness by expanding exports and improving the trade balance.

Question 16

What is the connection between investment and productivity?

Answer 16

Investment in new capital machinery can lead to improved productivity but there may be a time lag and workers may need training to work the new machinery.

Question 17

What is the connection between investment and unemployment?

Answer 17

Investment spending that adds to the stock of capital creates extra demand and employment in investment goods industries but there may also be a negative effect on total employment if investment introduces labor-saving technology.

Question 18

How does confidence levels affect investment?

Answer 18

When there is a reduction in business confidence and certainty investment will decrease because many businesses may postpone investment because they feel that demand will not be high enough to give them the rate of profit they need.

Question 19

How do expectations about the future affect investment?

Answer 19

Expectations about future demand and profitability can impact investment as businesses will invest more if they expect future demand to be high and if they expect to receive a good rate of return on their investment.

Question 20

How do interest rates affect investment?

Answer 20

An increase in interest rates will increase the cost of investment relative to the potential yield (rate of return) and as a result, planned capital investment projects on the margin may no longer be worthwhile. As a result, investment would decrease.

Question 21

How does profitability affect investment?

Answer 21

A decrease in corporate profitability would decrease investments and firms will be relying more on the bank to do investments, not their own internal funds.

Question 22

How does the relative price of labour and capital affect investment?

Answer 22

A fall in wages means that k/w rises so in the long run firms adopt more labour-intensive methods of production, substituting labour for capital, so therefore investment decreases.

Question 23

How does tech change affect investment?

Answer 23

An improvement in technology will mean that the new capital equipment is more productive than previous equipment, raising the rate of return on investment projects, all other things being equal.

Question 24

How does corporation tax affect investment?

Answer 24

A lower corporation tax rate may make a country more attractive to foreign investment and may encourage businesses to invest more domestically, increasing overall investment.

Question 25

How does risk affect investment?

Answer 25

Investors face a trade-off between the risk and return of their investment. An increase in risk may result in a lower investment as investors will require a higher return to compensate for the increased risk.

Question 26

How does consumer demand affect investment?

Answer 26

High consumer demand can lead to increased investment as businesses seek to meet the demand for their goods and services.

Question 27

How does national income affect investment?

Answer 27

Higher national income can lead to increased investment as businesses have more resources to invest and as consumers have more income to spend on goods and services.

Question 28

What is the accelerator effect?

Answer 28

The accelerator effect is when a given change in demand for consumer goods and series will cause a greater percentage change in demand for capital goods.

Question 29

What is the accelerator effect?

Answer 29

The accelerator effect is when an increase in national income results in a proportionately greater rise in investment.

Question 30

What happens to a firm’s production when demand is rising at a strong pace?

Answer 30

Firms will respond to growing demand by expanding production and making fuller use of their spare productive capacity. They may also choose to meet higher demand by running down their stocks of finished products.

Question 31

What happens when firms feel that the higher level of demand will be sustained?

Answer 31

If firms feel that the higher level of demand will be sustained, they may choose to increase spending on capital goods such as plant and machinery, factories and new technology in order to increase their capacity.

Question 32

What is the relationship between the demand for capital goods and consumer goods?

Answer 32

The demand for capital goods is being driven by the demand for the products that the firm is supplying to the market, giving rise to the accelerator effect.

Question 33

What is an example of the accelerator effect?

Answer 33

An example of the accelerator effect is the surge in capital investment in wind turbines due to the super-high level of oil and gas prices and a rising market demand for renewable energy.

Question 34

What are some other examples of accelerator effects?

Answer 34

Other examples of accelerator effects are budget airlines and online banking apps.

Question 35

What is the Capital Output Ratio?

Answer 35

The Capital Output Ratio is the ratio between the amount of capital inputs required to produce an extra unit of output.

Question 36

What is the accelerator model based on?

Answer 36

The accelerator model is based on a fixed capital to output ratio.

Question 37

What is an example of the Capital Output Ratio?

Answer 37

For example, if demand in a given year rises by £4 million and each extra £1 of output requires an average of £3 of capital inputs to produce this output, then the net level of investment required will be £12 million. The value of the accelerator is 3.

Question 38

What are the conditions for the accelerator effect to tend to be high?

Answer 38

The accelerator effect will tend to be high when the rate change of consumer income and spending is strongly positive, the amount of spare productive capacity for businesses is low, and the available supply of investment funds is high.