2.2.3 Investment

• Gross investment


  The amount that a firm invests in business assets that does not account for depreciations
• Depreciation


  When something starts to lose value, such as how a car loses value the older it gets
• If the depreciation in the value of the capital is greater than the growth in gross investment

  There is a decrease in the value of capital in the economy and there is no economic growth
• Net investment


  The actual addition to the capital stock of an economy, after depreciations have been considered
• Influences on investment


  • Rate of economic growth
  • Business expectations and confidence
  • Demand for exports
  • Interest rates
  • Access to credit
  • The influence of government and regulations
• Rate of economic growth

  If growth is high, firms will be making more revenue due to higher rates of consumer spending, meaning they have more profits available to invest
• Business expectations and confidence

  If firms expect a high rate of return, they will invest more. Firms need to be certain about the future, otherwise they will postpone their investments. Expectations about society and politics could also affect investment
• Keynes' animal spirits


  Instincts and emotions of human behaviour, which drives the level of confidence in an economy
• Demand for exports


  The higher demand is, the more likely it is that firms will invest, as they expect higher sales
• Interest rates


  Investment increases as interest rates fall, as the cost of borrowing is less and the return to lending is higher. High interest rates might also make firms expect a fall in consumer spending, discouraging investment
• Access to credit


  If banks and lenders are unwilling to lend, firms will find it harder to gain access to credit, so it is either more expensive or not possible to gain the funds for investment. Firms could use retained profits, and the availability of funds is dependent on the level of saving in the economy
• The influence of government and regulations

  The rate of corporation tax could affect investment, as lower taxes means firms keep more profits, which could encourage investment