ILO:
a) Distinction between gross and net investment
b) Influences on investment:
o the rate of economic growth
o business expectations and confidence
o Keynes and ‘animal spirits’
o demand for exports
o interest rates
o access to credit
o the influence of government and regulations
a) Distinction between gross and net investment
b) Influences on investment:
o the rate of economic growth
o business expectations and confidence
o Keynes and ‘animal spirits’
o demand for exports
o interest rates
o access to credit
o the influence of government and regulations
Gross and Net Investment:
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Gross investment is total level of expenditure by firms on capital equipment before depreciation is taken into account.
Net investment accounts for the depreciation of capital too. Whereby the capital expenditure may simple be replacement investment. If the network rail spent £20 billion on replacement train tacks and £15 billion on new rail lines, what would be the gross and net investment levels? |
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Influences on investment:
The rate of economic growth:
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Consider the different macro economic equilibrium positions on the diagram that occur on due to shifts in AD. What reasons would explain if I was to change at:
AD (Y,P) AD2 (Y2,P2) AD3 (Y3,P3) NB - Investment is expenditure on K, not employing L or purchasing raw materials. |
Business expectations and Confidence:
Expectation of an increase in AD = Increase C = Increase profits = provide finance and incentive for I into K to meet the increased C. This is why economic growth can lead to a positive multiplier built upon confidence.
Expectation of an increase in AD = Increase C = Increase profits = provide finance and incentive for I into K to meet the increased C. This is why economic growth can lead to a positive multiplier built upon confidence.
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Keynes and ‘animal spirits’
The use of the term ‘animal spirits’ by Keynes referred to a particular sort of confidence; ‘naive optimism’, where entrepreneurs, encouraged by a rising market, tended to take too many risks. In contrast, Keynes thought that if there was great uncertainty, only a manic, strong-willed entrepreneur would put capital at risk. When animal spirits are strong, investment is sufficient to maintain aggregate demand; when they are weak aggregate demand falls, and the economy lapses into depression. |
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The original passage by Keynes reads:
Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.
Keynes, John M. (1936). The General Theory of Employment, Interest and Money. London. Macmillan. pp. 161-162.
Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.
Keynes, John M. (1936). The General Theory of Employment, Interest and Money. London. Macmillan. pp. 161-162.
The interest rate:
As the cost of borrowing, is likely to have an inverse relationship with the amount of investment – only a few projects will be viable if the cost of credit is high.
Access to credit:
Following on from the ‘credit crunch’, students should also have an appreciation that banks may not be willing to lend to firms even if firms do wish to borrow. Banks still not doing enough to support business, say MPs
Corporation Tax
UK v the rest of the world
As the cost of borrowing, is likely to have an inverse relationship with the amount of investment – only a few projects will be viable if the cost of credit is high.
Access to credit:
Following on from the ‘credit crunch’, students should also have an appreciation that banks may not be willing to lend to firms even if firms do wish to borrow. Banks still not doing enough to support business, say MPs
Corporation Tax
UK v the rest of the world
Task:
Research and evaluate the success of the UK's Government's attempts to re-balance the economy and encourage I? (10 marks - 2K ,2P, 2A, 4E)