Capital Investment Flashcards
What is investment
Spending on capital goods such as new factories and other buildings machinery and vehicles
In market economies who does most of the investment
Private sector businesses, but a substantial amount comes from the government (by the state sector)
What is gross investment
Total investment in new capital inputs. It is the total amount that the economy spends on new capital.
What is net investment
Gross investment adjusted for capital consumption.
Some new investment needed each year to replace worn out machinery.
What will a rise in capital spending create
A positive multiplier effect - increased spending on capital goods boosts demand for industries that manufacture the technology / hardware / construction sector
Investment and jobs
Some investment projects cost jobs when a business replaces labour with capital inputs.
Investment also creates jobs in producing, designing and installing plant and equipment.
What is the importance of the quality of capital investment
A high level of investment alone may not increase LRAS (workers need training and time lags).
If there is sufficient demand, a growing capital stock may lead to excess capacity - putting downward pressure on prices and profits.
Implications of s rise in business investment
- boost AD
- boost creativity
- multiplier effects on the level of GDP
- boost competitiveness
Evaluation point of investment implications: increase AD
Some of the investment may be imported - a leakage from the circular flow
Evaluation point of investment implications: boost productivity
Might be a lengthy time lag between workers getting more capital and productivity rising
Evaluation point of investment implications: multiplier effect on the level of GDP
Some capital investment replaces labour and therefore might cause unemployment
Evaluation point of investment implications: increase a country’s competitiveness (+ improve the trade balance)
Many other factors affect competitiveness - including the level of the exchange rate
What is the accelerator effect
A relationship between planned capital investment and the rate of change of national income (GDP)
How is an accelerator effect created
-Industry with fast rising demand
-Firms may initially respond through using their own capacity
-If they want demand to be sustained they need to increase investment to increase capacity
= accelerator effect
(Change in demand for consumer goods and services will cause a bigger percentage change in demand for capital goods)
What is the negative accelerator effect
When the rate of growth of demand in an industry slows then net investment spending by businesses often falls
