determinants of investment Flashcards
(17 cards)
What is investment in macroeconomics?
Spending by firms on capital goods like machinery, tools, or buildings to increase long-term productive capacity. It is also a component of aggregate demand (AD).
How do interest rates affect investment?
Higher interest rates increase the cost of borrowing, reducing the incentive for firms to invest. This can lower AD and economic growth.
Give a real-world example of interest rate impact on investment.
In 2023, the Bank of England raised interest rates to 5.25%, leading to a slowdown in UK business investment, especially in housing and retail sectors.
What is one evaluation point for interest rates affecting investment?
Firms may still invest if they expect high future demand or have sufficient retained profits, despite higher borrowing costs.
Why might some firms be unaffected by rising interest rates?
Some firms have fixed loan agreements or use internal funding, making them less sensitive to interest rate changes.
How does business confidence influence investment?
If firms expect future sales and profits to rise, the expected return on investment increases, making them more willing to invest in capital.
What example shows business confidence affecting UK investment?
After Brexit uncertainty peaked in 2019, UK business investment stagnated due to concerns over trade barriers and regulation.
What is one evaluation point for business confidence affecting investment?
Expectations can be volatile and based on political or economic uncertainty, limiting reliable investment planning.
What are some broader evaluations of interest rate changes?
Interest rate effects can be outweighed by economic conditions. E.g., in 2009, rates were cut but investment still fell due to recession and low bank lending.
How do time lags affect investment responses to interest rate changes?
If a firm has already started a project, a rate rise is unlikely to affect current plans but may delay future investments.
How does economic growth affect investment?
Strong GDP growth increases expected demand, encouraging firms to invest to expand capacity. Investment is cyclical.
What is the accelerator theory?
Investment depends on the rate of change of economic growth; faster growth leads to more investment due to expected demand.
Give an example of economic growth encouraging investment.
In 2021, UK GDP rebounded post-COVID, prompting some firms to invest in new capacity.
What is a limitation of using growth as a signal for investment?
If growth is driven by unsustainable factors (e.g., consumer borrowing), firms may view it as temporary and delay long-term investment.
What is meant by ‘productivity of capital’ as a determinant of investment?
Long-term changes in technology can increase returns on capital, making investment more attractive.
What happens if there is a slowdown in technological progress?
Firms may cut back investment due to lower expected returns, reducing long-run growth potential.
Give a stat showing recent investment in productivity-enhancing tech.
In 2023, global corporate AI investment reached $142.3 billion, up from $92 billion in 2022.
