Investment Flashcards
What is Investment?
Addition to the capital stock of the economy
What is Depreciation/Capital Consumption?
Value of capital stock used up over time
What is Gross Investment?
Investment before accounting for depreciation
What is Net Investment?
Accounts for the depreciation of capital (Gross Investment - Value of Depreciation)
Why will firms only invest if return exceeds rate of interest?
Cost of borrowing for investment
Oppurtunity cost of using retained profit for Investment
What factors affect private sector investment?
Interest Rates Rate of Economic Growth John Maynard Keynes and 'Animal Spirits' Business Expectations and Confidence Demand for Exports Access to Credit Influence of Government and Regulation
When will firms only invest relating to Interest Rates?
Firms will only invest if return EXCEEDS rates of Interest
they want more money back than they are paying out to borrow the money
Why do most firms borrow to invest and not used retained profit?
They don’t have to pay as much tax
What affect does Interest Rates have on Investment?
As rate of Interest decreases, the amount of Investment increases
As rate of interest increases, the amount of investment decreases
Why does the rate of interest increase mean the amount of investment decreases?
There is less incentive to invest as you won’t get as much return
What affect does Economic Growth have on Investment?
More investment when economic growth increasing/high
Less investment /very little during recession
What affect does business expectations and confidence have on Investment?
Business leaders feel confident about future demand, output, price/costs, profit = more investment
Uncertainty = less investment
What are strong ‘Animal Spirits’?
When entrepreneurs are optimistic, encouraged by rising demand, ready to take risks, investment is high
What are weak ‘Animal Spirits’?
When individuals save more, businesses save more too an because demand and profits are lower than expected, they cut back on production and postpone/cancel capital investment projects
What happens when there are higher savings and reduced investment?
Reduced demand and incomes in the circular flow, causing economic contraction
