Factors Of Production (Capital) Flashcards
(ii) Explain what is meant by the marginal efficiency of capital(MEC)
(ii) Discuss reasons why the marginal efficiency of capital may fall.
Productivity - If there is a fall in in MPP/productivity of capital then this will result in a fall in the MEC.
Fall in price - If there is a reduction in the selling price this will result in a fall in marginal revenue and therefore MEC.
Rate of interest - If there is an increase in the rate of interest this will result in a fall in the MEC.
Increase in cost - An increase in the cost of capital goods will result in a fall in the MEC.
Discuss the reasons why investment is vital to the success of an economy. [25 marks]
Increase labour productivity - Investment ensures that labour are using the most up to date capital goods which increases their efficiency.
Reduced unemployment - Increased investment generates economic activity. This results in more workers being employed to meet this demand.
Generates government revenue - Increased investment generates economic activity resulting in greater tax receipts for the government.
Safe gaurds future wealth creating capacity - Investment ensures that capital goods are replaced as they get older, this safe gaurds future wealth.
Increased productive capacity - Greater investment increased the countries productive capacity allowing us to take advantage of economic up turns.
Discuss the factors that are currently affecting the levels of investment in the Irish economy. [25 marks]
Business people’s expectations - If business people are optimistic about the future of the economy or the sector they are operated in, then they are more likely to invest.
Rate of interest- Interest rates are at historically low levels. This reduces the cost of borrowing which increased the marginal efficiency of capital, making investment more attractive.
Government policy - If government policy is favourable towards investment, then investment is more likely to take place. An example of this would be maintaining our low corporation tax rate or a reduced rate of VAT for certain industries.
International climate - Many Irish firms are export orientated. Levels of investment in these firms depends upon growth levels in their export markets.
Cost of capital- The greater the cost of capital the lower the marginal efficiency of capital and so investment tends to fall.
Industrial relations - There is a lot of industrial relations unrest in certain sectors of the Irish economy as workers seeks pay restoration. This has created a lot of uncertainty resulting in reduced levels of investment in these sectors.
Discuss the actions/policies that the government could adapt to promote greater levels of investment in the Irish economy. [20 marks]
REMEMBER GITS
Grants- Increase provision of grants by enterprise Ireland and the IDA would help to promote greater levels of investment.
Infrastructure improvements - Continued investment in infrastructure is vital to reduce the cost base of operating in Ireland. The government must ensure that high speed broadband is nation wide and that our road and rail network is on a part with other developed nations.
Taxation - Maintaining Ireland’s low corporation rate of 12.5% helps to provide additional funds towards investment. In addition a reduced rate of VAT in certain industries would promote greater investment.
Social partnership - The government could re-visit social partnership in an effort to improve the industrial relations climate. This would provide greater certainty for businesses making investment for attractive.
Discuss the factors are currently influencing levels of savings in the Irish economy
Levels of income - With the Irish economy performing well(growth expected of 4.8% in 2016) workers are receiving pay increases and bonuses, resulting in greater levels of savings.
Rate of interest - Interest rates are at historically low levels which reduces the incentive for individuals to keep their money on deposit.
Rates of inflation - An increases in the CPI reduces the real rate of interest, making savings less attractive due to a loss in purchasing power.
Consumer sentiment - If individuals are optimistic about the future e.g job security then they are more likely to spend rather than save.
Government policy - The current rate of DIRT is 41% and this acts as a disincentive to savings. In addition the government provides relief on private pensions contributions and individuals top rate of PAYE. This encourages greater levels of savings.
New central bank guidelines - Individuals looking to purchase a house must now have 20% of the purchasing price as a deposit. This is resulting in greater levels of savings in the Irish economy.
