Investment Flashcards
Definition of investment
The addition to the capital stock of the economy
Definition of retained profit
Profit kept back by a firm for its own use which is not distributed to shareholders or used to pay taxation.
How do gross and net investment vary?
Gross investment measures investment before depreciation (the value of goods and services depreciates overtime as it wears out and is used up). Whilst net investment takes away depreciation
Is there high or low investment when there is high interest rates? Why?
Low investment because with high interest rates there is a higher opportunity cost of investment and so there will be a lower amount of planned investment in the economy
What 6 factors shift the planned investment schedule?
Changes in national income, cost of capital goods, technological change, confidence levels, risk and government policy
How does an increase in national income affect investment?
An economy that is growing quickly will need more investment than one growing slowly, therefore it is likely to shift planned investment schedule to the right
How does an increase in cost of capital goods affect investment?
If price of capital goods rises then the expected rate of return on investment projects will fall if firms can’t pass on increased higher prices, so investment will reduce
How do technological changes affect investment?
It will make new capital equipment more productive than previous equipment. This will raise return on investment and so investment will increase
How do confidence levels affect investment?
If a manager is optimistic then he will invest more
How does risk affect investment?
The higher the level of risk in an economy or industry, the lower the level of investment is likely to be
What two factors does investment become crucially dependent on?
The amount of retained profit avalible and the availability of suitable investment projects.
