2.2.3 - Investment

Question 1

Influences on investment

Answer 1

• the rate of economic growth
• business expectations and confidence
• demand for exports
• interest rates
• access to credit
• the influence of government spending and regulations

Question 2

What is investment

Answer 2

Spending on capital goods e.g. plant (factories), machinery and infrastructure

Question 3

What is the difference between gross and net investment

Answer 3

• gross investment is total investment on new capital inputs
• net investment is gross investment adjusted for capital consumption (depreciation)
• depreciation is the reduction in the market value of capital

Question 4

Factors influencing business investment

Answer 4

• actual/expected demand for goods and services
• cost of capital - opportunity cost/retaining profits
• cost of borrowing/access to credit
• corporation taxes
• business confidence
• new technology/pace of change
• government intervention

Question 5

Benefits of investment + evaluation

Answer 5

• injection into circular flow of income - machinery bought may be an import
• may improve productivity (extra supply) - time lag/training issues be for productivity goes up
• increases industries producing investment goods (extra demand) - using robots, automation and AI replaces workers leading to unemployment
• improves competitiveness through price/quality/availability - many other factors affect competitiveness including exchange rate

Question 6

Importance of infrastructure investment

Answer 6

• tend to have large upfront costs but benefits that will add up over many years
• should cause both aggregate demand and supply to increase
• demands on infrastructure such as roads will rise along with economic growth and population
• high multipliers effects from multi-billion investment projects