2.2.3: Investment (I) Flashcards
What is investment?
The addition of capital stock to the economy.
What is capital stock?
What is used to produce other goods/services.
What is gross investment?
The total amount that the economy spends on new capital.
What is net investment?
Gross investment - depreciation.
What is depreciation?
The fall of value of capital goods (due to wear and tear).
How does economic growth influence investment?
-Businesses will be more confident in a growing economy.
-Higher investment levels are required to cope with higher demand.
Who developed the term ‘animal spirit’?
John Keynes.
How does ‘animal spirit’ influence investment?
-Keynes used this term to refer to the collective mood of investors on whether investment would be profitable.
-When this mood is strong, capital investment increases.
How does demand for exports influence investment?
-During an economic boom, demand for exports increases.
-Firms will be encouraged to invest in capital assets to cope with demand.
How does interest rates influence investment?
-Lower interest rates make investment projects cheaper.
-This helps in stimulating investment.
How does regulation influence investment?
-Businesses may take advantage of government grants to fund their own investments.
-Reduced regulations makes it easier for firms to invest (e.g. reducing bureaucracy when locating a new factory).
What is bureaucracy?
A government system where power is divided among different departments.
How does access to credit influence investment?
-If banks are unwilling to lend (e.g. during a recession), firms will find it harder to gain access to credit.
-It makes investment difficult or impossible.
How does business confidence affect investment?
-Firms are likely to increase investment if they are confident in high economic growth.
What are factors affecting investment?
-Demand for exports.
-Interest rates.
-Regulation.
-Access to credit.
-Business confidence.
