2.2.3 Investment (I)

What is gross investment?

Gross investment refers to the total value of all new physical capital (machinery, equipment, buildings) that is produced or purchased within an economy over a specific time period. It includes both replacement investment and net investment.

How does depreciation affect net investment?

Depreciation reduces the value of capital goods over time, so net investment = gross investment - depreciation.

Explain Keynes’ concept of “animal spirits” in investment.

Animal spirits refer to the emotional and psychological factors (irrational optimism/pessimism) influencing firms’ investment decisions, causing fluctuations in economic activity

How do changes in interest rates impact both consumption and investment?

Higher interest rates reduce consumption (by increasing savings incentive) and investment (by increasing borrowing costs).

What is included in gross investment?

Gross investment includes replacement investment (to maintain existing capital) and net investment (to increase the capital stock).

What is net investment?

Net investment is the portion of gross investment that represents an increase in the capital stock. It is calculated by subtracting depreciation from gross investment.

How is net investment calculated?

Net Investment = Gross Investment - Depreciation.

Give a real-world example of gross and net investment.

If a company spends $100,000 on new machinery (gross investment) but $20,000 of their existing machinery wears out (depreciation), their net investment is $80,000.

How does the rate of economic growth influence investment?

When the economy is growing at a healthy rate, businesses are more likely to invest in new capital to meet increased demand.

What happens to investment during economic downturns?

During economic downturns, investment tends to decline as demand and business confidence fall.

How do business expectations influence investment?

Positive expectations about future economic conditions and business prospects encourage investment.

How does business confidence affect investment decisions?

High confidence in the economy can lead to increased capital expenditures.

What does Keynes mean by the term ‘animal spirits’?

‘Animal spirits’ refers to the emotional factors influencing investment decisions, such as confidence, optimism, and entrepreneurial drive.

How can ‘animal spirits’ affect investment levels?

Confidence, optimism, and entrepreneurial spirit can drive investment even when rational analysis might suggest caution.

How does demand for exports influence investment?

Strong demand for a country’s exports can boost investment, particularly in export-oriented industries.

Provide an example of export demand boosting investment.

If foreign demand for a country’s automobiles is high, domestic auto manufacturers may invest in expanding production.

How do low interest rates influence investment?

Low interest rates reduce the cost of borrowing for businesses, making investment projects more attractive.

How do high interest rates influence investment?

Higher interest rates can discourage investment due to increased borrowing costs.

Why is access to credit important for investment?

The availability of credit, including loans and lines of credit, affects a firm’s ability to finance investment projects.The availability of credit, including loans and lines of credit, affects a firm’s ability to finance investment projects.

What can happen during a credit crunch?

During credit crunches, businesses may face difficulty obtaining funds for investment, leading to reduced investment activity.

How do government policies influence investment?

Government policies such as tax incentives and subsidies can encourage businesses to invest.

How can regulations affect investment?

Regulations can influence the ease of doing business and the overall attractiveness of investment.

Give a real-world example of restricted credit affecting investment.

During the 2008 financial crisis, businesses faced difficulty accessing credit due to a frozen credit market, which contributed to a significant drop in investment in various sectors.