Investment Mindmap

View mindmap
  • Investment
    • Investment- the addition to the capital stock of the economy
      • gross investment measures investment before depreciation (depreciation occurs as the stock wears out over time).
        • in recent years, only 1/4 of gross investment represents an addition to the capital stock of the economy.
      • investment in human capital is investment in education and training.
      • investment in physical capital is investment in aids to production i.e factories.
      • investment can be made in both the private and public sectors. In the public sector it is constrained by political considerations.
    • The rate of interest- affects the level of investment in 2 ways:
    • The rate of economic growth- the accelerator theory
      • If the same amount of products are produced each year, Firms will only invest to replace worn out physical capital. There is no point investing further than this level.
      • if the economy expands, firms need to increase their investment so they can produce more, same goes the other way.
          • I - investment in time period t, Y -Y   - change in real income during year t, a is accelerator coefficient, it is the capital output ratio.
            • the capital output ratio is the amount of capital needed in an economy to produce a given quantity of goods.
      • the accelerator theory is that I is linked with changes in output or Y.
    • Costs- private sector firms need to make a profit. They need to sell products made from an investment and keep their costs per unit below selling price
      • increasing costs will reduce the rate of return from investment, which should decrease investment.
    • business expectations and confidence- more confidence= more investment. animal spirits cannot be measures, they are a feeling
    • the world economy- if its booming, the demand for exports should increase which leads to an increase in domestic investment.
    • access to credit- when more loans are available, more investment is likely to happen.
    • retained profit- if firms don't have a lot of retained profits, they are unlikely to invest.
    • the influence of government and regulations-
      • governments can influence investment in particular sectors:
        • by cutting taxes on profits, this increases the rate of return on investments
        • or by guaranteeing loans to firms from banks


No comments have yet been made

Similar Economics resources:

See all Economics resources »See all Investment resources »