Th2.2: Influences on Investment Flashcards
What are the first 4 influences on investment?
rate of economic growth
business expectations and confidence (animal spirits)
demand for exports
interest rates
What are the last 4 influences on investment?
influence of government and regulations
Rate of Economic Growth
if the economy is growing, firms will need to increase investment to match the level of demand and if it is shrinking, firms will not need to replace their old machines and so investment will fall
What is the accelerator theory?
the investment over a period of time is the change in real income times that capital-output ratio. the capital output ratio is the amount of investment needed to produce a given amount of goods. thus, if income rises, the level of investment will rise
Business expectations and confidence - animal spirits
when businesses are confident about the future and expect future growth, investment will increase as they want to prepare for the future
Demand for exports
if the world economy is booming, demand for exports is likely to increase and therefore exporting firms’ investment is likely to increase to cope with this extra demand
Interest rates
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
What does the Keynes’ Marginal Efficiency of Capital (MEC) graph show?
how higher interest rates will lead to a fall in investment
Influence of government and regulations
governments can encourage investment through policy decisions
regulations affect investment as a highly regulated economy tends to see less investment as regulation increases the cost and time taken to invest e.g planning regulations
Access to credit
investment will be 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. in recessions, it is usually more difficult to access credit as risks are higher and banks are aware of this - fear firms won’t be able to pay money back
Define retained profit
the profits kept by a firm and not shared with shareholders or used to pay taxes
Retained profit
if firms are making higher retained profits, investment is likely to increase as they have money available to invest
Technological Change
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
Costs
a rise in the cost of any capital project increases the risk the level of risk that you are taking and therefore leads to lower levels of investment. rises in costs of making goods will also decrease investment and profitability
