Investment

Question 1

What is the I in GDP

Answer 1

Investment expenditure (most is new physical capital
- 20% of UK GDP

Question 2

How to work out the I in GDP

Answer 2

I = New K + Inventories + New Housing
K - Capital, use production function to understand this, PROFIT MAX

Question 3

Aggregate production function

Answer 3

Y = K* L (1-*)
K = Physical capital
L = no of workers

Question 4

Production Function of a firm and its features

Answer 4

Yi = Ki* Li (1-*)
Ki = Physical Capital of firm i
Li = no .of workers employed by firm i

Marginal products are +
Dimishing returns, Y’’ = -

Question 5

How to work out optimal investment and assumptions

Answer 5

Profit maximising of Yi = Ki* Li (1-*), of a firm
- Capital is rented at rental price -r
- Wage rate paid to workers is w
- Price of outputs fixed at -p =1

Therefore, MPK = -r
this is the tanency point between PF and factor price