3.2.3

Investment

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Investment

Investment is spending that improves or grows the capital stock of an economy. It is funded with savings, so if investment rises, it is very likely that saving has also risen. Investment is influenced by:

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Rate of economic growth

  • Investment is usually measured as a % of GDP. If GDP is high and rising, then investment is likely to rise too.
  • A high rate of economic growth also signals economic strength. This can give businesses confidence in the future and they will invest to increase their productive capacity, expecting increases in demand to continue in the future.
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Business expectations

  • If businesses expect demand for their goods and services to continue rising then they are likely to invest to increase their productive capacity.
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Keynes 'animal spirits'

  • Keynes referred to 'animal spirits', explaining why firms will be overoptimistic and invest excessively in good times, before reducing investment too much when consumer spending is lower and business confidence is weaker.
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Export demand

  • Exports are a component of aggregate demand.
  • If international demand for a firm's goods or a nation's goods rose, then it is likely that they would invest to increase the capacity of their production.
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Interest rates

  • Companies often have to borrow money to invest.
  • Apple's new campus, Apple Park cost $5bn. If it had to borrow that money, an interest rate of 10% p.a. would lead to $500m of annual debt repayments. If the interest rate was 1%, it would lead to $50m of annual debt repayments.
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Access to credit

  • Higher access to credit makes it more likely that firms will be able to borrow to invest.
  • In the 2008 financial crisis, many businesses said that they were unable to borrow from banks. Banks reduced their lending because they had made such large losses in the financial crisis.
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Government and regulation

  • Governments can subsidise or encourage investment in certain industries.
  • Usually, investment support is concentrated in a few industries, like Renewable Energy, Artificial Intelligence or Healthcare.

Jump to other topics

1Introduction to Markets

2Market Failure

3The UK Macroeconomy

4The UK Economy - Policies

5Business Behaviour

6Market Structures

7A Global Perspective

8Finance & Inequality

9Examples of Global Policy

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