Investment - AD Flashcards
What is investment?
Investment is the addition of capital stock to the economy
What is gross investment?
Gross investment is the amount of investment carried out and ignores the level of depreciation
What is net investment?
Net investment is gross investment minus the value of depreciation
How does rate of economic growth affect investment?
In a growing economy, there will be higher levels of investment as businesses would be more confident about their investment
A growing economy needs more investment in order to cope with higher levels of demand
What is the capital-output ratio?
The capital output ratio is the amount of investment needed to produce a given amount of goods
What is the formula for investment over a period of time?
Change in Real Income *** Capital-Output Ratio
What is the main concept of the accelerator theory?
If incomes rise, the level of investment will rise
How do business expectations and confidence affect investment?
When businesses are confident about the future and expect future growth, investment will increase as they want to prepare for the future
Business confidence is hard to measure
How does demand for exports affect investment?
If the world economy is booming, demand for exports is likely to increase, therefore exporting firms’ investment is likely to increase to cope with this extra demand. This has a knock-on effect on other firms
How do interest rates affect investment?
Most investment is done through borrowing. High interest rates mean that borrowing is more expensive, so a business needs to be more confident of good profits in order to cover the extra cost of borrowing. Therefore, higher interest rates lead to a fall in investment
How does the government and its regulations affect investment?
Governments can encourage investment by their own policy decisions. Regulations also affects investment as a highly regulated economy tends to see less investment; this is because regulations cause an increase in cost and time taken to invest
How does the access to credit affect investment?
Investment is lower when an investment has a high risk attached to it, as it means there will be less access to credit and interest rates will be higher
What are retained profits?
Retained profits are the profits kept by a firm and not shared with shareholders, or used to pay taxes
How do retained profits affect investment?
If firms are making higher retained profits, investment is likely to increase as they have more money available to invest
How does technological change affect investment?
Improvements in technology will improve or speed up production which will increase the level of profitability, meaning the investment has a better prospect of success. Change also means businesses need to invest to keep up with the best technology
