Investment and Net Exports

What counts as investment in GDP?

New capital goods, new residential construction, and inventory changes.

Why is investment important?

It increases productive capacity and supports long-run economic growth.

How do interest rates affect investment?

Higher borrowing costs generally reduce investment; lower rates encourage it.

What other factors influence investment?

Expected profits, business confidence, technology, taxes, and existing capacity.

Where do firms get investment funds?

Retained earnings, bank loans, bonds, equity financing, and government incentives.

What is the expenditure multiplier in a simple model?

Multiplier = 1/(1 − MPC) = 1/MPS, under simplified assumptions.

If MPC = 0.8, what is the simple spending multiplier?

1/(1 − 0.8) = 5.

What are exports?

Goods and services produced domestically and sold abroad.

What are imports?

Goods and services produced abroad and purchased domestically.

What is a trade surplus?

Exports exceed imports, so NX is positive.

What is a trade deficit?

Imports exceed exports, so NX is negative.

What determines exports?

Foreign income, relative prices, exchange rates, and foreign demand for domestic products.

What determines imports?

Domestic income, preferences, relative prices, and exchange rates.

How does higher U.S. income generally affect imports?

Imports generally rise as households and firms purchase more goods and services.

How does higher foreign income generally affect U.S. exports?

U.S. exports generally rise because foreign buyers can spend more.

Why are imports subtracted in the GDP formula?

To exclude foreign-produced goods already counted in C, I, or G.

Does a trade deficit automatically mean an economy is unhealthy?

No. It can reflect strong domestic demand and international financial flows.

What is a general fact about U.S. trade?

The U.S. commonly has a goods trade deficit and often a services trade surplus.