Lesson 15 - Investment

Question 1

Give two examples of an investment?

Answer 1

• Increasing the amount of stock
• Building new factories

Question 2

What is the definition of an investment?

Answer 2

in an economic sense, investment is the purchase of goods that are not consumed today but are used in the future to create wealth.
Investment is the addition to Capital Stock of the economy, its any item that is used to produce other goods and services.

Question 3

In market based economies, most investment is done by businesses, which sector are they in?

Answer 3

The private sector

Question 4

What is Gross Investment Spending?

Answer 4

Gross Investment Spending is total spending on new capital.

Question 5

Investment can be in two forms, what are these?

Answer 5

Physical capital (machines)
Human capital ( eg better education to increase labour productivity).

Question 6

Define Gross Investment?

Answer 6

Gross investment spending is total investment on new capital inputs (eg new machinery).
It is the total amount that the economy spends on new capital

Question 7

Define Net Investment?

Answer 7

Net investment is gross investment adjusted for capital consumption. Some investment is needed each year to replace worn out machinery.

Question 8

What does a fall in investment usually lead to?

Answer 8

A recession

Question 9

Why does a fall in investment usually lead to a recession?

Answer 9

If a business does not invest then it will likely make cutbacks. This will mean that unemployment rises and consumer spending falls. It will also mean that the government receives less income tax so government spending will fall. Furthermore, if a business makes cutbacks then output will fall meaning exports will fall and the UK will be forced to import more. All of theses factor will lead to GDP falling and a recession.