2.2.3 Investment (1) Macro

INVESTMENT SPENDING

Investment, for economists, is solely about the purchase of capital / the addition to the economy’s capital stock

CAPITAL

Goods and services used to produce other goods and services

GROSS INVESTMENT

Is the total amount that the economy spends on new capital goods, before depreciation is taken into account.

GROSS INVESTMENT SPENDING

The total investment on new capital inputs

NET INVESTMENT

Total amount the economy spend on new capital goods, but takes into account for the depreciation of capital to. So gross investment – capital depreciation. If gross investment is higher than depreciation, then net investment will be positive. This means that businesses will have a higher productive capacity and can meet rising demand in the future

FACTORS INFLUENCING PLANNED BUSINESS INVESTMENT-

Actual & expected demand for goods & services, Expected profits and business taxes, Business confidence (animal spirits), Interest rates + availability of business finance, Government lowering corporation tax or offering other tax incentives

THE BASIC ACCELERATOR EFFECT

The accelerator effect means that when demand and national income rise, firms increase their investment. At first, businesses use spare capacity or existing stock to meet higher demand, but if they expect demand to stay high, they invest in new machinery, factories, and technology. This means a small rise in consumer demand can lead to a much larger rise in investment in capital goods.

ANIMAL SPIRITS

John Maynard Keynes coined the notion of animal spirits which refers to a mix of confidence, trust, mood and expectations. When confidence is low, individuals save more, businesses save more too and, because demand and profits are lower than expected, they cut back on production and perhaps postpone or cancel capital investment projects.