Investment Flashcards
What is investment?
The addition to the capital stock of the economy.
What is physical capital?
The apparatus used to produce goods/services.
What is human capital?
The personal attributes deemed useful for production.
What would be an example of an investment into physical capital?
Spending on machinery, factories, etc.
What would be an example of an investment into human capital?
Spending on education, training, etc.
Define depreciation
The reduction in the value of an asset over time. E.g. the value of a machine bought 10 years ago will be less than its cost when it was purchased.
Define gross investment
Investment before depreciation.
Define net investment
Gross investment - value after depreciation
What are the factors affecting investment (7)?
1) Interest rates
2) The influence of the government and regulations
3) Demand for exports
4) The rate of economic growth
5) Business profitability
6) Access to credit
7) Keynes and ‘animal spirits’
How does business profitability influence investment (2)?
1) 70% of industrial and commercial development in the UK is financed through retained profits, so the more profitable the firm, the more they invest.
2) If costs rise, due to any reason, firms retain less profit, and investment falls.
How does the rate of economic growth influence investment (3)?
1)When the economy is not growing, firms will not increase their investment, mainly investing in replacing depreciating capital.
2) When the economy is shrinking, firms may reduce investment in order to cut back on excess capacity.
3) When the economy is growing, firms will increase investment, in order to increase their productive capacity.
How can the government and regulations influence investment (4)?
1) A reduction in corporation tax will reduce costs, increasing retained profits and investment. Vice versa.
2) Governments can provide grants to businesses investing in social, environmental and ethical causes.
3) Highly regulated industries are expensive for firms to operate in, meaning less retained profits and less investment. Vice versa.
4) The government can act as a guarantor for a business loan used for investment, increasing access to credit. 30% of investment comes from loans.
How does access to credit influence investment?
Credit is used to finance investment, and if a firm’s access to credit is low, banks are less likely to approve their loan applications. This will cause investment to fall. Vice versa. Access to credit depends heavily on the economic condition and monetary policy.
How do interest rates influence investment?
When firms borrow to invest, they have to pay back interest. The higher the interest rate, the less profitable the investment as the cost is higher. Vice versa.
What are ‘animal spirits’?
A term used by John Maynard Keynes, referring to the mood/attitude of managers when making decisions regarding investment.
