as economics. investment is the addition to the capital stock of the economy made by firms....
TRANSCRIPT
AD and InvestmentChris Rodda
AS Economics
Investment
Investment is the addition to the capital stock of the economy made by firms . Investment can be into physical capital, such as spending on new factories or raw materials, or investment may be on human capital, such as worker training schemes. However the value of capital will diminish over time as it is used up and suffers wear and tear; this is called depreciation. Net investment is positive if gross investment is greater than depreciation.
Determinants of Investment
1. New Technology2. Business confidence3. Rate of interest4. The accelerator
Investment
Technical change will make capital more productive than before and so reduce the need for new investment.
Working capital is spending on stocks of raw materials or finished goods before they are sold.
Planned investment is determined by expected after-tax real rate of return on capital projects
Interest rates may play an influential role – because they represent the opportunity cost of funds used to finance investment schemes
A fall in interest rates decreases the cost of investment – planned investment projects on the margin may become financially worthwhile
Interest rates
Planned Capital Investment (Id)
R1
R3
R2
I3 I1 I2
Investment Demand
Real rate of interest
Households Firms.....
Consumption (C)
S Savings Finance sector Investment I
T Taxes Govt. sector Govt. spending
G
M Imports Overseas sector Exports X
Injections (j)Withdrawals (w)(or leakages) Income (Y)
The Accelerator
The capital:output ratio shows the amount of capital used to to make one unit of production.
If it takes a £5000 machine to make a £1000 worth of socks the capital:output ratio is 5:1
The accelerator is therefore 5.
Year Output capital
required
New capital
required
1 25 125 0
2 25 125 0
3 30 150 25
4 40 200 50
5 40 200 0
6 35 175 0
Assumes there is no depreciation.
Investment depends on the change in income
Output is the same as real national
income (Y)
Multiplier/Accelerator model
An increase in income leads to accelerator effect i.e.
an increase in investment
injections are > leakages.
injection is multiplied leading to an increase in income
which causes an increase in injections and so on until the productive potential of the economy is
reached.
Short v long run
LRASPrice level
P1
P2
Y1 Y2Yfe
AD increases and negative output gap closes
AD1
AD2
SRAS
LRAS1
Y1 Y2 Yfe
SRAS
Real National Output
Real National Output
LRAS2
LRAS moves outward and achieves non inflationary growth
EVALUATION
The effect of investment (ceteris paribus) will depend on:
Size of the investment Size of the multiplier and accelerator Spare capacity in the economy – i.e. how close to
full employment we start at. How well the money is spent and on what. What else is happening to C, G,X, I (relax ceteris
paribus) Some Investment will leak out as imports, so the
value of the multiplier is smaller esp. for the UK. Unemployment down, imports up in SR, exports
up in LR. Inflation up in SR and down in LR.
Origami Break
Investment
Investment is the addition to the ______________ stock of the economy made by ____________. Investment can be into ____________ capital, such as spending on new factories or raw materials, or investment may be on ___________ capital, such as worker training schemes. However the value of capital will diminish over time as it is used up and suffers wear and tear; this is called ___________. Net investment is positive if _________ investment is greater than depreciation.
Determinants of Investment
1. ____________ 2. the rate of _____________ 3. Business _____________ 4. the _____________ theory
Investment
____________ change will make _______ more productive than before and so reduce the need for new investment.
____________capital is spending on stocks of raw materials or _____________ goods before they are sold.
Planned investment is determined by expected after-tax ______ rate of return on _______ projects
_________ ______ may play an influential role – because they represent the _________ _______ of funds used to finance investment schemes
A fall in interest rates decreases the cost of investment – _____________ investment projects on the margin may become financially worthwhile
Interest rates
R1
R3
R2
I3 I1 I2
Investment Demand
Households Firms.....
Consumption (C)
S Finance sector I
T Govt. sector G
M Overseas sector X
Injections (j)Withdrawals (w)(or leakages) Income (Y)
The Accelerator
The _________:output ratio shows the amount of capital used to to make one unit of production.
If it takes a £5000 machine to make a £1000 worth of socks the capital:output ratio is 5:1
The accelerator is therefore _____.
Year Output capital
required
New capital
required
1 25 125 0
2 25 125 0
3 30 150 25
4 40 200 50
5 40 200 0
6 35 175 0
Assumes there is no depreciation.
Investment depends on the change in income
Multiplier/Accelerator model
An increase in income leads to accelerator effect i.e.
injections are > leakages.
injection is multiplied leading to an increase in
income
which causes an increase in injections and so on until the productive potential of the economy is
reached.
Short v long run
LRASPrice level
P1
Y1 Yfe
AD increases and negative output gap closes
AD1
AD2
SRAS
LRAS1
Y1 Y2
SRAS
Real National Output
Real National OutputLRAS moves outward and
achieves non inflationary growth
EVALUATION
The effect of investment (ceteris paribus) will depend on:
Size of the _____________ Size of the ___________ and accelerator Spare capacity in the economy – i.e. how close to
full __________ we start at. How well the money is spent and on what. What else is happening to C, G,X, I (relax
____________) Some Investment will leak out as imports, so the
value of the multiplier is ______________ esp. for the UK.
Unemployment down, imports up in SR, exports up in LR. Inflation up in SR and down in LR.
Investment
Investment is the addition to the ______________ stock of the economy made by ____________. Investment can be into ____________ capital, such as spending on new factories or raw materials, or investment may be on ___________ capital, such as worker training schemes. However the value of capital will diminish over time as it is used up and suffers wear and tear; this is called ___________. Net investment is positive if _________ investment is greater than depreciation.
Determinants of Investment
1. ____ ____________ 2. the rate of _______ 3. ___________ confidence 4. the ________________
Investment
____________ change will make _______ more productive than before and so reduce the need for new investment.
____________capital is spending on stocks of raw materials or _____________ goods before they are sold.
Planned investment is determined by expected after-tax real rate of return on _______ projects
Interest ______ may play an influential role – because they represent the opportunity _______ of funds used to finance investment schemes
A fall in interest rates decreases the cost of investment – _____________ investment projects on the margin may become financially worthwhile
Interest rates
R1
R3
R2
I3 I1 I2
Households Firms.....
Consumption (C)
Finance sector
Overseas sector
Injections (j)Withdrawals (w)(or leakages)
The Accelerator
The ____________ ratio shows the amount of capital used to to make one unit of production.
If it takes a £5000 machine to make a £1000 worth of socks the capital:output ratio is _____
The accelerator is therefore ______
Year Output capital
required
New capital
required
1 25 125 0
2 25 125 0
3 30 150 25
4 40 200 50
5 40 200 0
6 35 175 0
Assumes there is no depreciation.
Multiplier/Accelerator model
An increase in income leads to accelerator effect i.e.
injections are > leakages.
which causes an increase in injections and so on until the productive potential of the economy is
reached.
Short v long run
LRASPrice level
P1
Y1 Yfe
AD increases and __________ output gap closes
AD1
AD2
SRAS
LRAS1
Y1 Y2
SRAS
Real National Output
Real National OutputLRAS moves outward and
achieves non ___________ growth
EVALUATION
The effect of investment (ceteris paribus) will depend on:
Size of the _____________ Size of the ___________ and accelerator Spare capacity in the economy – i.e. how close to
full __________ we start at. How well the money is spent and on what. What else is happening to C, G,X, I (relax
____________) Some Investment will leak out as imports, so the
value of the multiplier is ______________ esp. for the UK.
Unemployment _______, imports ___ in SR, exports up in LR. Inflation up in ___ and down in ____.
Investment
Investment is the addition to the ______________ stock of the economy made by ____________. Investment can be into ____________ capital, such as spending on new factories or raw materials, or investment may be on ___________ capital, such as worker training schemes. However the value of capital will diminish over time as it is used up and suffers wear and tear; this is called ___________. Net investment is positive if _________ investment is greater than depreciation.
Determinants of Investment
1. ____________ 2. ______________ _____________ 3. ___________ _____________ 4. the _____________ theory
Investment
____________ change will make _______ more productive than before and so reduce the need for new investment.
____________capital is spending on stocks of raw materials or _____________ goods before they are sold.
Planned investment is determined by _________ _______ ________ __________ ___ on _______ projects
_________ ______ may play an influential role – because they represent the _________ _______ of funds used to finance investment schemes
A fall in interest rates decreases the cost of investment – _____________ investment projects on the _________ may become financially worthwhile
Interest rates
Households Firms.....
Finance sector
Overseas sector
Injections (j)Withdrawals (w)(or leakages)
The Accelerator
The _____________________ ratio shows the amount of capital used to to make one unit of production.
If it takes a ________ machine to make a £1000 worth of socks the capital:output ratio is 5:1
The _____________ is therefore ______
Year Output capital
required
New capital
required
1 25 125 0
2 25 125 0
3 30 150 25
4 40 200 50
5 40 200 0
6 35 175 0
Multiplier/Accelerator model
An increase in income leads to accelerator effect i.e.
which causes an increase in injections and so on until the productive potential of the economy is
reached.
Short v long run
LRASPrice level
P1
Y1 Yfe
AD increases and the __________ _______ ____ closes
AD1SRAS
LRAS
Y1
SRAS
Real National Output
Real National OutputLRAS moves outward and
achieves ___ ___________ ______
EVALUATION
The effect of investment (ceteris paribus) will depend on:
Size of the _____________ Size of the ___________ and accelerator Spare capacity in the economy – i.e. how close to full
__________ we start at. How well the money is spent and on what. What else is happening to __ __ ___ __ (relax
____________) Some Investment will leak out as imports, so the value
of the multiplier is ______________ esp. for the UK. Unemployment _______, imports ___ in SR, exports up
in LR. Inflation up in ___ and down in ____.