Investment Flashcards
What is investment?
It is the addition of capital stock that is used to produce other goods and services
When does investment take place in the eyes of an economist?
For an economist investment only takes place if real products are created. For example:
Putting money into bank account would be saving ; the bank buying a computer to handle ur account would be investment.
Buying shares in a new cop may would be saving ; buying machinery to set up a company would be investment
What is depreciation?
The decrease in the value of stock?
What causes depreciation?
Caused by the wear if stock over time as it is used
What is gross investment?
Measures investment before depreciation
What is net investment?
Gross investment after depreciation
What are the 2 different types of capital?
Human capital
Physical capital
What is investment in human capital?
Investment in the education and training of workers
What is investment in physical capital?
Investment in factories and machinery etc
What is capital stock?
The total amount of capital goods in a firm, industry or economy
How can investment be financed?
Firms borrowing money from banks
Retained profit
How does the rate of interest affect levels of investment (borrowing)?
The higher the rate of interest, the lower the profit from any investment will be (Ceteris paribus).
A rise in interest rates will therefore reduce the number of profitable investment projects and so firms will invest less
The lower the rate of interest, the more investment projects will be profitable and so there will be more investment
What is retained profit?
Profits that firms keep and do not distribute to their owners
How does the rate of interest affect levels of investment (retained profit)?
The higher the rate of interest that banks offer on savings, the more attractive it is for firms to save money rather than invest in physical capital
The lower the rate if interest, the greater incentive for firms to spend their savings and invest
What are the determinants of investment?
Changes in interest rates
Changes in business confidence
Changes in technology
Changes in business taxes
The level of corporate indebtedness
Legal changes
How does business confidence affect investment?
If businesses are optimistic, they spend more on investment, and the AD curve shifts to the right
If businesses are pessimistic, they spend less on investment, and the AD curve shifts to the left
How do interest rates affect investment?
Increases in interest rates raise the cost of borrowing, and this forces businesses to reduce investment spending financed by borrowing, and therefore the AD curve shifts to the left
Decreases in interest rates mean businesses can now finance their investment spending by borrowing at a lower cost, and the AD curve shifts to the right
How does technology affect investment?
Improvements in technology stimulate investment spending, therefore causing increases in AD and shifting the curve to the right
How do business taxes affect investment?
Increasing taxes causes for investment spending to decrease as less money is available and the AD curve will shift to the left
Deceasing taxes causes for investment spending to increase as more money is available and the AD curve to shift to the right
How does the level of corporate indebtedness affect investment
If businesses have high levels of debt, they would be less inclined to make investments and would be more inclined to pay off their debt and the AD curve shifts to the left
A low level of debt leads to more investment and a shift to the right on the AD curve
How do legal changes affect investment?
For example, small businesses often don’t have access to credit, meaning they can’t borrow easily to finance investments.
Many developing and transitioning economies don’t have the necessary laws to secure property rights.
AD curve would shift to the right if you can pattern this
