macroeconomics - licence 1 economie gestion - chapter 3...

Definition and measurementThe decision to invest

Investments and demand of goods and services

Macroeconomics - Licence 1 EconomieGestion

Chapter 3: Investment

Rémi Bazillier 1

1 [email protected]://remi.bazillier.free.fr

Université d’Orléans

Rémi Bazillier Chapter 3: Investment

[email protected]

http://remi.bazillier.free.fr



Plan

1 Definition and measurementDefinition

2 The decision to investNet present value (NPV)Internal rate of returnInvestment function

3 Investments and demand of goods and servicesThe accelerator effectA formulation of the accelerator effectEmpirical validation of the accelerator effectA critical analysis of the accelerator effectExtensions of the accelerator effect



Investments and demand of goods and servicesDefinition

Definition

“Purchases of new houses and apartments by people, andpurchases of new capital goods (machines and plants) byfirms”.




Growth rate of investment and GDP in France




Investment rate




Investment by institutional sector

PercentageNon financial firms

and individual firms 52.4Households 27.7

Public administration 16.5Other sectors 3.4

Source: INSEE




Investment by sector

Sector PercentageAgriculture 2.7

Industry 15.1(including intermediate goods) (5.3)

Construction industry 1.6Services 66.1

(Including real estate) (32.7)Other 14.7

Source: INSEE




Net present value (NPV)Internal rate of returnInvestment function

The net present value (NPV)

DiscountingCapitalizationActuarial calculation





Actuarial calculations

Sn = S0(1 + i)n (1)

↔ S0 =Sn

(1 + i)n (2)

Present value:

PV =n∑

t=1

Rt

(1 + i)t (3)





Net present value

Internal financing: Investment if PV = P0 > C0

Debt financing: Investment if R1 > C0(1 + i)↔R1

(1+i) = PV = P0 > C0





Internal rate of return

r= internal rate of return for which present value of netincomes = cost initial investmentInvestment if r ≥ i





Investment function

Investment depends primarily on two factors:Level of sales - increase in sales→ increase production→may need to buy additional machines→ increaseinvestmentThe interest rate - If a firm needs to borrow to finance itsinvestment: the higher is the interest rate, the less attractiveis to borrow and thus invest

I = I(Y , i) (4)(+,−) (5)




The accelerator effectA formulation of the accelerator effectEmpirical validation of the accelerator effectA critical analysis of the accelerator effectExtensions of the accelerator effect

The accelerator effectThe accelerator effect refers to a positive effect on private fixedinvestment of the growth of the market economy. The growth ofprivate investment is higher than the growth of GDP.





A formulation of the accelerator effect

It+1 = k(Dt+1 − Pt) + Ir ,t+1 (6)

with k the accelerator coefficient, Dt+1 the demand in t + 1, Ptthe production in t and Ir ,t+1 the replacement investment.





Formulation of the accelerator effect

Source: Jalladeau, Joël (1993), Introduction à la macro-économie. Modélisation de base et redéploiements

théoriques contemporains, Bruxelles, De Boeck-Wesmael, p. 64Rémi Bazillier Chapter 3: Investment




Empirical validation of the accelerator effect





A critical analysis of the accelerator effect

1 Two conditionsFull employment of capitalNo brutal changes in production techniques

2 Flexibility of capital adjustments?3 Rise and fall of consumption don’t have symmetric effects4 The accelerator effect is more complex:

Heterogeneous accelerator effect between sectorsInfluenced by prices evolutions





Production capacity usage rate

Sources : Ifo, Insee et Commission européenne, calculs Insee





Extensions

Acceleration effect and firms’ profitsAcceleration effect and businessmen’s expectationsThe flexible accelerator effect





The accelerator effect and businessmen expectations

It+1 = k .α(Dt+1 − Pt) (7)

with α the expectation coefficient





The flexible accelerator effect

It+1 = βk(Dt+1 − Pt) + Ir ,t+1 (8)

with βk , the flexible accelerator coefficient


macroeconomics - licence 1 economie gestion - chapter 3...

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