Investment

• What is Investment?

  The total spending on capital goods
• Capital goods


  • Any goods used for generating future income (bonds, stocks, property, real estate)
• Depreciation


  Value of capital goods which have become worn down and have to be replaced; decrease in monetary value of an asset over time
• Function of Investmentin an economy

  Helps increase capacity of an economy
• Increased capacity


  Results in increased potential economic growth
• Gross investment


  The total spending on capital goods, including replacing old capital goods and purchasing new goods
• What influences the rate of economic growth

  Net investments
• If net investment is constant

  There will be no economic growth as all of the investment will just replace depreciated capital
• Increasing economic growth


  Will increase net investment
• Fast economic growth


  Signals greater urgency to invest
• Acceleration effect


  When an increase in GDP results in a rise in capital investment spending
• Firms' well-fulfilling prospects(Business confidence)


  • Tend to come true, as they believe that the future (even when the current and severe times will actually be good because the forecasting process leads to overconfidence)
• High demand for exports


  Causes net investment to rise
• Exchange rate depreciation


  Increases demand for exports
• Conditions of the global economy

  Can impact investments
• Increased interest rates


  Discourage investment as it has a high opportunity cost
• How is Investment by firmsfinanced

  Is mostly financed through loans
• Limited access to loans

  Holds back investment, especially in developing countries
• High levels of regulation

  Makes business conditions unfavourable and impacts investment
• Liberalisation of markets


  Has a positive impact on investment
• Net investment


  Gross investment-Depreciation.

  Indicates the addition of new capital goods and extra production possibilities.
• What influences investment


  Rate of economic growth. Accelerator effect. Business confidence. Demand for exports. Interest rates. Access to credit. Government policy.
• Animal spirits


  the instincts and emotions that influence human behaviour and business confidence