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AS Economics. Investment is the addition to the capital stock of the economy made by firms. Investment can be into physical capital, such as spending.

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Presentation on theme: "AS Economics. Investment is the addition to the capital stock of the economy made by firms. Investment can be into physical capital, such as spending."— Presentation transcript:

1 AS Economics

2 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.

3 1. New Technology 2. Business confidence 3. Rate of interest 4. The accelerator

4

5  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.

6 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

7 Planned Capital Investment (Id) R1 R3 R2 I3I1I2 Investment Demand Real rate of interest

8 Households Firms..... Consumption (C) SSavingsFinance sectorInvestmentI TTaxesGovt. sectorGovt. spendingG MImportsOverseas sectorExportsX Injections (j) Withdrawals (w) (or leakages) Income (Y)

9  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.

10 YearOutput capital required New capital required Assumes there is no depreciation. Investment depends on the change in income Output is the same as real national income (Y)

11 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.

12 LRASPrice level P1 P2 Y1 Y2 Yfe AD increases and negative output gap closes AD1 AD2 SRAS LRAS1 Y1 Y2 Yfe SRAS Real National Output LRAS2 LRAS moves outward and achieves non inflationary growth

13 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.

14

15 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.

16  1. ____________  2. the rate of _____________  3. Business _____________  4. the _____________ theory

17

18  ____________ 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.

19 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

20 R1 R3 R2 I3I1I2 Investment Demand

21 Households Firms..... Consumption (C) SFinance sectorI TGovt. sectorG MOverseas sectorX Injections (j) Withdrawals (w) (or leakages) Income (Y)

22  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 _____.

23 YearOutput capital required New capital required Assumes there is no depreciation. Investment depends on the change in income

24 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.

25 LRASPrice level P1 Y1 Yfe AD increases and negative output gap closes AD1 AD2 SRAS LRAS1 Y1 Y2 SRAS Real National Output LRAS moves outward and achieves non inflationary growth

26 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.

27 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.

28  1. ____ ____________  2. the rate of _______  3. ___________ confidence  4. the ________________

29

30  ____________ 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.

31 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

32 R1 R3 R2 I3I1I2

33 Households Firms..... Consumption (C) Finance sector Overseas sector Injections (j) Withdrawals (w) (or leakages)

34  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 ______

35 YearOutput capital required New capital required Assumes there is no depreciation.

36 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.

37 LRASPrice level P1 Y1 Yfe AD increases and __________ output gap closes AD1 AD2 SRAS LRAS1 Y1 Y2 SRAS Real National Output LRAS moves outward and achieves non ___________ growth

38 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 ____.

39

40 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.

41  1. ____________  2. ______________ _____________  3. ___________ _____________  4. the _____________ theory

42

43  ____________ 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.

44 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

45

46 Households Firms..... Finance sector Overseas sector Injections (j) Withdrawals (w) (or leakages)

47  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 ______

48 YearOutput capital required New capital required

49 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.

50 LRASPrice level P1 Y1 Yfe AD increases and the __________ _______ ____ closes AD1 SRAS LRAS Y1 SRAS Real National Output LRAS moves outward and achieves ___ ___________ ______

51 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 ____.


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