investment Flashcards
Investment
the addition of capital stock to the economy i.e. machines and factories used to produce other goods and services
Gross investment
the amount of investment carried out and ignores the level of depreciation
net investmen
gross investment minus the value of depreciation.
Influences on investment
Rate of economic growth
in a growing economy, there will be higher levels of investment as businesses would be more confident about their investments and the higher demand would lead to a higher return rate on the investment
a growing economy needs more investment in order to cope with the higher levels of demand.
Business expectations and confidence- ‘Animal spirits’
When businesses are confident about the future and expect future growth, investment will increase as they want to prepare for the future.
If they are fearful of the future, then they will not invest money in new ideas or machiner
Demand for exports
f the world economy is booming, demand for exports is likely to increase and therefore exporting firms’ investment is likely to increase to cope with this extra demand. This will have a knock-on effect and encourage other firms to increase their investment.
Interest rates
Most investment is done through borrowing. High interest rates mean that borrowing is more expensive, so a business needs to be more confident of good profits in order to cover the extra costs of borrowin
Influence of government and regulations
Governments can encourage investment by their own policy decisions. For example, they could offer tax breaks or grants to businesses to try and encourage them to invest.
Access to credit
investment will be lower when an investment has a high risk attached to it, as it means there will be less access to credit and interest rates will be higher. In recessions, it is usually more difficult to access credit as risks are higher and banks become more risk aware, fearing firms will not be able to pay the money back.
