Aggregate Demand – Investment (I) Flashcards
What is depreciation in capital consumption?
value of the capital stock that falls in value over time as it wears out or is used up.
What is investment?
addition to capital stock of the economy e.g. factories, machines, offices, equipment, stocks of materials used to produce other goods.
What is gross investment?
investment before depreciation.
What is net investment?
gross investment – depreciation.
What is private sector investment?
investment undertaken by businesses in the private sector.
What is public sector investment?
investment by the government often in infrastructure (transport, telecommunications, energy networks, new schools, new hospitals).
What is Foreign direct investment (FDI)?
capital investment made by a company based in one country in another country e.g. Nissan in Sunderland.
List reasons why firms invest?
To expand their business and increase their output capacity
To reduce average costs of production due to economies of scale
To increase efficiency and productivity through innovation and technological progress
To meet an increase in market demand and increase market share
To expand a firm’s product range
To replace depreciated capital
To increase competitiveness at home and abroad
What is the impact of investment on AD and AS?
Investment adds to aggregate demand AD causing short run growth, lower unemployment
Successful investment also adds to the economy’s capacity, long run aggregate supply LRAS; long run non-inflationary growth
What are factors influencing investment?
- Interest rate
- Availability of finance
- Demand for the final product
- Business confidence
- Corporate taxes
- Business regulation
- Technological change
How does interest rate influence investment?
lower interest rate reduces the cost of borrowing and boosts the attractiveness of investing relative to retaining profit; investment will increase.
How does availability of finance influence investment?
if a firm is borrowing funds to invest, it has to access them from financial institutions; if the firm has some of its own funds, it will be easier to borrow
How does demand for the final product influence investment?
if the demand for a firm’s output increases, a firm has a greater incentive to expand to meet the demand, driven by potential for more profit.
How does business confidence influence investment?
if business are confident about their future sales they are more likely to invest
How does corporate taxes influence investment?
if taxes on companies eg corporation tax or business rates, fall, there is more retained profit to use for investment
