Investment [2.2.3] Flashcards
What is investment?
Investment is the purchase of goods that are not consumed today but are used to create wealth, it is also the addition of capital stock into the economy.
What are some examples of investment?
Building new factories
Increasing the amount of stock
How can investment be represented?
By a PPF for example if the output of cotton increases by 100 the output of wheat may decrease by 20
What is Gross domestic investment ?
Gross domestic investment is spending on fixed assests plus net changes in the level of inventories (stocks).
Fixed assests include machinery and equipment purchases ; the construction of roads, railways, house, schools, offices and industrial buildings.
Inventories are stocks of goods held by firms to meet temporary or unexpected fluctuations in production or sales.
20% of UK GDP
Why does investment happen?
To replace worn out capital which has depreciated in value
Due to new technology that will make firms more efficient
Due to increase in aggregate demand that will result in firms needing to increase capacity
Due to a change in interest rates and the amount of loans available from banks
Changes in profits made by business which can be re-invested
What is the difference between Gross investment and Net investment?
Gross investment spending is the total investment on new capital inputs
It is the total amount that the economy spends on new capital
Net investment is =Gross investment adjusted for depreciation of capital. About 75% of investment is to replace worn out machinery
What would be the short and long term impact of spending more on investing goods?
The short term impact would cause an increase in the number of capital goods being produced and a decrease in the number of consumers goods.
The long term impact of investment would cause an increase in the number of capital and consumer goods
How is investment an important component of AD?
Investment affects competitiveness of a country in a globalising world.
Investment is the most volatile sector in our economy
Fluctuations in GDP are largely fluctuations in investment
Recessions usually start because of a fall in investment
Recoveries are often brought about by an increase in investment
How does investment encourage AD?
For machinery higher investment encourages higher output, which lowers costs increases competitiveness and then AD.
Furthermore can increase output and efficiency and a lower opportunity costs, there will be a competitiveness advantage and an increase in exports
For expansion An increase in the size of a factory causes an increase in business purchases. Causes an increases in consumer confidence and an increase in employment and a decrease in wages. Finally an increase in consumption
How has investment fluctuates in the UK in the last 30 years?
Investment fell in the early 90s because of the cold war.
Investment increased in 2000s because of skill and technology
Investment fell in 2009 because of a recession
What does the UK show the most growth in?
Most growth from services firms benefit from lower costs and lower prices furthermore higher profits.
Why has the UK underperformed in investment in the UK?
Leaving the EU, Political instability, economy was not growing
What is the definition of investment?
Firms spend on capital goods to increase productive capacity
What factors influence investment?
Interest rates - Borrowing or investing by retaining profits, a fall in interest rates creates an incentive to borrow, a lower rate of return, Larger propensity to invest. Average rate of return how much money get back in return.
Business expectations and confidence - Expectation of future profits and demand expectation, invective to invest lower AD, sales forecasting.
Corporate tax - Retained profits after tax lower tax means higher retained profits. Higher potential to invest used to invest
Spare capacity - Greater spare capacity lowers propensity to invest lowers to capacity high propensity to invest.
Level of competition - Other spending or investing on capital machinery more businesses invest to innovate to improve productive potential to get ahead of the competition.
Cost of capital - Rise in the cost of capital increase level of risk that taking therefore leads to lower investment. Rises in costs of making goods, such as raw materials and wage will decrease investment reducing profitability. Less money to reinvest lowering rate of return
Retained profit - Retained profits profits after tax not shared with shareholders or used to pay taxes. Not all firms take into account opportunity cost of investment
What is the accelerator effect?
The accelerator effect states that investment levels are related to the rate of change of GDP
An increase in the rate of economic growth will cause a corresponding larger increase in the level of investment. But a fall in the rate of economic growth will cause a fall in investment levels.
