2.2.3 Investment (I)

Question 1

How does investment aid an economy?

Answer 1

It helps to increase the capacity (production possibilities) of an economy.
Increased capacity = increased potential economic growth.

Question 2

What is depreciation?

Answer 2

The decrease in monetary value of a capital good (asset) over time.

Question 3

What is gross investment?

Answer 3

The total amount of spending on capital goods.
This spending includes replacing old capital goods and purchasing new capital goods.

Question 4

What is net investment?

Answer 4

The gross investment - depreciation.

Question 5

What are the influences on investment?

Answer 5

• Rate of economic growth
• Interest rates
• Demand for exports
• Influence of the government and regulations
• Business expectations and confidence
• Keynes and animal spirits
• Access to credit

Question 6

What influence does the rate of economic growth have on investment?

Answer 6

• Increasing growth sends a signal that higher output will generate higher profits.
• The faster the economic growth, the greater the urgency to invest.

Question 7

What influence does demand for exports have on investment?

Answer 7

• If demand for exports increases, firms will likely invest to meet the global demand.
• If demand for exports decreases, firms are less likely to invest.

Question 8

What influence does the influence of the government and regulations have on investment?

Answer 8

• Government intervention can increase investment e.g. subsidies.
• Government regulation can decrease investment (it raises costs of production for firms and can lower profits).

Question 9

What influence do business expectations and confidence have on investment?

Answer 9

• The longer a period of economic growth, the higher the business confidence will be, encouraging investment.
• If growth slows, future expectations of profits will decrease, and investment decisions will become harder.

Question 10

What influence does Keynes and animal spirits have on investment?

Answer 10

• John Maynard Keynes believed firms exhibit too much optimism in the good times and take too many risks. They run with the mood of the economy and make less rational investment decisions as they follow the herd.

Question 11

What influence does access to credit have on investment?

Answer 11

• The easier the access to loanable funds, the higher the levels of investment.
• Some developing economies have low access to credit and this holds back investment.