impact of changes in the level of investment (3)

Question 1

what are the macroeconomic effects of changes in the level of investment in a particular country

Answer 1

• actual economic growth + reduced unemployment -> incr investment (15% of AD in UK) -> injection into circular flow of income -> incr AD = real GDP up = +ve multiplier effect -> businesses expand -> incr demand for labour -> reduced cyclical unemployment -> incr consumer spending -> incr consumption (60% of AD) -> reduction in -ve output gap -> actual eco. growth

Question 2

evaluate the macroeconomic effects of changes in the level of investment in a particular country

Answer 2

• increase of investment may not be that high due to business confidence
• depends on the size of the multiplier
• time lag -> investment in larger infrastructure projects e.g. roads, transport (HS2) -> take years before boosting growth
• investment financed by government borrowing -> higher budget deficits -> higher interest rates -> cost of borrowing increases -> less available funds for private sector investment -> limited growth
• if investment incr rapidly -> risk of demand-pull inflation (Phillips Curve)

Question 3

what are the microeconomic effects of changes in the level of investment in a particular country

Answer 3

• may exploit economies of scale + increase competitiveness -> higher investment in capital goods (e.g. automation, AI) -> incr productive + dynamic efficiency -> benefit from technical EoS -> lower unit costs -> higher profit margins -> ability to lower prices -> improved international competitiveness for exporters -> incr consumer surplus -> improved consumer welfare
• substitution of labour + capital -> i.e. investment in self-checkout services or Ai-drive customer service -> firms may substitute labour for capital -> incr structural unemployment -> risk of occupational immobility as workers may lack transferable skills

Question 4

evaluate the microeconomic effects of changes in the level of investment in a particular country

Answer 4

• short-term job losses may occur, but investment may lead to job creation in diff. sectors in the long run
• gov. policies such as apprenticeships can help workers overcome occupational immobility of labour -> can eter new industries
• depends on level of interest rates -> if high -> borrowing is less attractive -> reduced willingness to invest
• if in an uncompetitive market -> change in investment may not be significant