Capital Flashcards
chapter 16
define ‘capital’ !
anything manmade that assists in the production of wealth.
e.g. machinery, mobile phones, tractors, buildings and roads, etc…
what is the payment for capital?
interest
define social capital!
refers to the assets/wealth owned by the community or society in general
e.g. hospitals, parks, roads
what id fixed capital?
the stock of fixed assets such as plant, equipment and tools
define working capital!
includes all finished goods, work in progress goods and stocks of raw materials
what is private capital?
assets owned by individuals
e.g. computers, cars
what is the rate of interest?
the payment to capital, as those who sacrifice present consumption must be rewarded by those who need funds for present use
is capital necessary if u only want to work in the short run?
no,
capital is necessary if an economy is to be productive both now and in the future
define the MARGINAL EFFICIENCY OF CAPITAL (MEC) !
the extra profit earned as a result of employing one extra unit of capital
or
the extra efficiency from the last piece of capital you bought
i. e. the marginal revenue productivity of additional capital goods minus their cost
e. g. if an extra oven costs 2000 euro and adds 5000 euro to total revenue, its MEC is 3000 euro.
what factors influence the MEC of a good?
- COST OF CAPITAL GOODS
higher costs, longer payback period, less profitable - RATE OF INTEREST
high rate, less attractive - SELLING P OF THE GOOD BEING SOLD
if selling P decreases, additional capital gets less attractive - FAIL IN PRODUCTIVITY OF THE EXTRA CAPITAL BEING USED
if they get older, lower productivity, may even become obsolete - CAPITAL WIDENING AND CAPITAL DEEPENING
what is capital widening ?
a scenario whereby the amount of capital per worker remains unchanged. an increase in the capital stock leaves the capital/labour ratio unchanged.
e.g.
year 1: 5 machines and 5 workers
year 2: 10 machines and 10 workers
what is capital deepening?
a scenario whereby the amount of capital increases, resulting in more capital per worker in the economy. here, the production process is being more capital intensive.
year 1: 5 machines and 5 workers
year 2: 10 machines and 5 workers
what are savings? (definition)
income not spent/ non-consumption
why do people save money?
- DEFERRED EXPENDITURE
saving for holidays, furniture or the purchase of a car… - UNFORESEEN EVENTS
provide for emergencies such as unexpected medical expenses, house repair, etc… - SPECULATION
investment opportunities
4 .CREDIT RATING
to get a future loan
- RETIREMENT
private pension schemes
Who saves in our economy?
- individuals save by deposing funds in financial institutions and earning a rate of interest & by paying PRSI as this is a contribution to a future state pension
- businesses by retaining profits and not paying out dividends. there funds can be used for future expansions
- Gouvernement if it incurs a budget surplus (government current revenue greater than gov current spending)
what is a budget surplus?
when the current revenue is greater than current spendings
what influences the amount saved by individuals?
- LEVEL OF INCOME
increase in Y means increase is savings
2.RATE OF INTEREST
increase in rate means increase in savings
3.RATE OF INFLATIONS
increase in rate means decrease in savings
4.TAX ON SAVINGS
increase in taxes means decrease in savings
what is investment?
involves the production of capital goods or any additional stock in the economy.
what is gross investment?
the total production of capital goods in an economy.
what is net investment?
gross expenditure on capital formation less depreciation.
it is important that an economy continually replaces old capital to enable continued future production and prevent a running down of capital stock.
define ‘depreciation’ !
when capital goods wear out because of use/age.
name 4 factors affecting the level of investment in the economy…
- RATES OF INTEREST
higher rates, higher cost of borrowing, less investment - EXPECTATIONS OF THE FUTURE
businesspeople invest more if they are optimistic about the economy or their sector. - COST OF CAPITAL GOODS
greater cost, lower investment - GOVERNMENT POLICY
favorable policies like state grants, reduction in corporation taxe, development of infrastructure, … - INTERNATIONAL ECONOMIC CLIMATE
ireland is an open economy and relays on foreign investment - INDUSTRIAL RELATIONS CLIMATE
more investment if relatively peaceful!
strikes,… cost lots of money - AVAILABILITY OF CREDIT
if it becomes easier to get credits, investment increases - MARGINAL EFFICIENCY OF CAPITAL
if MEC increases, investment increases too
what is the importance of investment and production of capital goods in an economy?
- INCREASED PRODUCTIVE CAPACITY
greater selections of goods can be produced - INCREASED LABOUR PRODUCTIVITY
allows labour to become more efficient - INCREASED EMPLOYMENT
increases aggregate demand, resulting in the demand for more employees
4.INCREASED GNP
higher gross national product, greater demand, increaed spending and a higher standard of living
- GENERATES FUTUR WEALTH FOR THE ECONOMY
e. g. pad and hospital infrastructure - INCREASED GOVERNMENT REVENUE
increased economic activity, will generate additional tax revenues
what is the loanable funds theory?
…
what is the return for capital?
interest
what is the Keynesian lighidity preference theory?
…
discuss the effects that a rise in interest rates may have on the Irish economy!
- BORROWING DISCOURAGED
borrowing is more expensive, resulting in higher loan repayments and reduced spending powers … - SAVING ENCOURAGED
higher rates of return - VALUE OF THE CURRENCY
may attract international money into the eurozone - REDUCED COMPETITIVENESS
production costs increase - DISINCENTIVE TO INVESTMENT
m. e.c. would fall, lower profits - ECONOMIC GROWTH IS HINDERED
with possible lower investment - REVENUE RECEIVED FROM DIRT
with additional savings
