Investment

Question 1

Causes Of Low UK investment (3)

Answer 1

• Weakness in UK financial sector and short-term management
• Barriers to accessing the UK
• Animal Spirits.

Question 2

How does Weakness in UK financial sector and short-term management cause low UK investment ?

Answer 2

This causes banks to become weak, so they can’t give loans to businesses. This means businesses can’t invest, lowering the productivity of workers (economic recession).

Question 3

How does barriers to accessing the UK cause low UK investment ?

Answer 3

There is less knowledge of investing in the UK as the laws are difficult to understand. This causes international investments to the UK to decrease as they are put off.

Question 4

Who made the idea of Animal Spirits ?

Answer 4

John Maynard Keynes (1933-36).

Question 5

What is Animal Spirits ?

Answer 5

When the economy is experiencing prosperity, business confidence rises (animal spirits) = the mood of managers + owners of firms about the future of their industry and the wider economy.

Question 6

Consequences Of Low UK Investment (3)

Answer 6

• Slower economic growth
• Weaker productivity growth (lower output per worker)
• Worsening of the net trade balance.

Question 7

Examples Of Investment

Answer 7

Factories
Machines
Offices
Stocks Of Materials

Question 8

Definition Of Gross Investment

Answer 8

The addition of capital stock, both to replace the existing capital stock which has been used up and the creation of additional capital.

Question 9

Definition Of Net Investment

Answer 9

Gross investment minus depreciation.

Question 10

Definition Of human capital

Answer 10

investment in education / training of workers.

Question 11

Definition of physical capital

Answer 11

investment in factories ; subject of this unit (the I in AD).

Question 12

Variables that affect Investment (8)

Answer 12

Rate Of Interest
The rate of economic growth
Costs
Business expectations + confidence
World economy
Retained Profit
Government Regulations.

Question 13

Rate of interest effect on investment

Answer 13

• Some investment is financed by firms borrowing money from banks. Interest paid by a loan is then part of the cost of an investment project.
• Higher the rate of interest = Lower the investment.

Question 14

Retained Profit effect on Investment

Answer 14

• Retained profit : Profit kept back by a firm for its own use which isn’t distributed to shareholders or used to pay taxation.
• Some investment is financed by this
• Higher the retained profit = more investment.

Question 15

The rate of economic growth effect on investment

Answer 15

• If rate of economic growth is negative = Investment is lower
• The idea that investment is linked to changes in output or income of economy is called accelerator theory.

Question 16

Accelerator Theory Equation

Answer 16

It = a(Yt - Yt-1)
• I is investment in time period t
• Yt - Yt-1 is change in real income during year t.
• a is the accelerator coefficient and is the capital-output ratio.

Question 17

Costs effect on investment

Answer 17

• Private sectors need to make profit and sell products made from investment
• So costs per unit need to be below selling price
• Increase costs = reduced profitability = reduced rate of investment.

Question 18

Business expectations and confidence effect on investment

Answer 18

• If firms expect their sales to increase, they’re more likely to invest in new capital equipment.
• Higher business confidence = More investment.

Question 19

World economy effect on investment

Answer 19

If the world economy is booming = demand for exports increase = increased domestic investment.

Question 20

Retained Profit effect on investment

Answer 20

•If retained profit is low, firms will tend to not invest.
• 70% of individual/commercial investment is financed by this.

Question 21

Government regulations effect on investment.

Answer 21

Highly regulated economies tend to increase costs for firms, which reduces profitability. This means they’re discouraged from investment.