Capital

Question 1

define ‘capital’ !

Answer 1

anything manmade that assists in the production of wealth.

e.g. machinery, mobile phones, tractors, buildings and roads, etc…

Question 2

what is the payment for capital?

Answer 2

interest

Question 3

define social capital!

Answer 3

refers to the assets/wealth owned by the community or society in general

e.g. hospitals, parks, roads

Question 4

what id fixed capital?

Answer 4

the stock of fixed assets such as plant, equipment and tools

Question 5

define working capital!

Answer 5

includes all finished goods, work in progress goods and stocks of raw materials

Question 6

what is private capital?

Answer 6

assets owned by individuals

e.g. computers, cars

Question 7

what is the rate of interest?

Answer 7

the payment to capital, as those who sacrifice present consumption must be rewarded by those who need funds for present use

Question 8

is capital necessary if u only want to work in the short run?

Answer 8

no,

capital is necessary if an economy is to be productive both now and in the future

Question 9

define the MARGINAL EFFICIENCY OF CAPITAL (MEC) !

Answer 9

the extra profit earned as a result of employing one extra unit of capital
or
the extra efficiency from the last piece of capital you bought

i. e. the marginal revenue productivity of additional capital goods minus their cost
e. g. if an extra oven costs 2000 euro and adds 5000 euro to total revenue, its MEC is 3000 euro.

Question 10

what factors influence the MEC of a good?

Answer 10

1. COST OF CAPITAL GOODS
   higher costs, longer payback period, less profitable
2. RATE OF INTEREST
   high rate, less attractive
3. SELLING P OF THE GOOD BEING SOLD
   if selling P decreases, additional capital gets less attractive
4. FAIL IN PRODUCTIVITY OF THE EXTRA CAPITAL BEING USED
   if they get older, lower productivity, may even become obsolete
5. CAPITAL WIDENING AND CAPITAL DEEPENING

Question 11

what is capital widening ?

Answer 11

a scenario whereby the amount of capital per worker remains unchanged. an increase in the capital stock leaves the capital/labour ratio unchanged.

e.g.
year 1: 5 machines and 5 workers
year 2: 10 machines and 10 workers

Question 12

what is capital deepening?

Answer 12

a scenario whereby the amount of capital increases, resulting in more capital per worker in the economy. here, the production process is being more capital intensive.

year 1: 5 machines and 5 workers
year 2: 10 machines and 5 workers

Question 13

what are savings? (definition)

Answer 13

income not spent/ non-consumption

Question 14

why do people save money?

Answer 14

1. DEFERRED EXPENDITURE
   saving for holidays, furniture or the purchase of a car…
2. UNFORESEEN EVENTS
   provide for emergencies such as unexpected medical expenses, house repair, etc…
3. SPECULATION
   investment opportunities

4 .CREDIT RATING
to get a future loan

5. RETIREMENT
   private pension schemes

Question 15

Who saves in our economy?

Answer 15

1. individuals save by deposing funds in financial institutions and earning a rate of interest & by paying PRSI as this is a contribution to a future state pension
2. businesses by retaining profits and not paying out dividends. there funds can be used for future expansions
3. Gouvernement if it incurs a budget surplus (government current revenue greater than gov current spending)

Question 16

what is a budget surplus?

Answer 16

when the current revenue is greater than current spendings

Question 17

what influences the amount saved by individuals?

Answer 17

1. LEVEL OF INCOME
   increase in Y means increase is savings

2.RATE OF INTEREST
increase in rate means increase in savings

3.RATE OF INFLATIONS
increase in rate means decrease in savings

4.TAX ON SAVINGS
increase in taxes means decrease in savings

Question 18

what is investment?

Answer 18

involves the production of capital goods or any additional stock in the economy.

Question 19

what is gross investment?

Answer 19

the total production of capital goods in an economy.

Question 20

what is net investment?

Answer 20

gross expenditure on capital formation less depreciation.

it is important that an economy continually replaces old capital to enable continued future production and prevent a running down of capital stock.

Question 21

define ‘depreciation’ !

Answer 21

when capital goods wear out because of use/age.

Question 22

name 4 factors affecting the level of investment in the economy…

Answer 22

1. RATES OF INTEREST
   higher rates, higher cost of borrowing, less investment
2. EXPECTATIONS OF THE FUTURE
   businesspeople invest more if they are optimistic about the economy or their sector.
3. COST OF CAPITAL GOODS
   greater cost, lower investment
4. GOVERNMENT POLICY
   favorable policies like state grants, reduction in corporation taxe, development of infrastructure, …
5. INTERNATIONAL ECONOMIC CLIMATE
   ireland is an open economy and relays on foreign investment
6. INDUSTRIAL RELATIONS CLIMATE
   more investment if relatively peaceful!
   strikes,… cost lots of money
7. AVAILABILITY OF CREDIT
   if it becomes easier to get credits, investment increases
8. MARGINAL EFFICIENCY OF CAPITAL
   if MEC increases, investment increases too

Question 23

what is the importance of investment and production of capital goods in an economy?

Answer 23

1. INCREASED PRODUCTIVE CAPACITY
   greater selections of goods can be produced
2. INCREASED LABOUR PRODUCTIVITY
   allows labour to become more efficient
3. INCREASED EMPLOYMENT
   increases aggregate demand, resulting in the demand for more employees

4.INCREASED GNP
higher gross national product, greater demand, increaed spending and a higher standard of living

5. GENERATES FUTUR WEALTH FOR THE ECONOMY
   e. g. pad and hospital infrastructure
6. INCREASED GOVERNMENT REVENUE
   increased economic activity, will generate additional tax revenues

Question 24

what is the loanable funds theory?

Answer 24

…

Question 25

what is the return for capital?

Answer 25

interest

Question 26

what is the Keynesian lighidity preference theory?

Answer 26

…

Question 27

discuss the effects that a rise in interest rates may have on the Irish economy!

Answer 27

1. BORROWING DISCOURAGED
   borrowing is more expensive, resulting in higher loan repayments and reduced spending powers …
2. SAVING ENCOURAGED
   higher rates of return
3. VALUE OF THE CURRENCY
   may attract international money into the eurozone
4. REDUCED COMPETITIVENESS
   production costs increase
5. DISINCENTIVE TO INVESTMENT
   m. e.c. would fall, lower profits
6. ECONOMIC GROWTH IS HINDERED
   with possible lower investment
7. REVENUE RECEIVED FROM DIRT
   with additional savings