Lecture 132 Contents Why investment is so volatile? Investment Decision: Present value and Cost Marginal productivity theory of investment A Numerical Example of Investment Problem Investment tax credit and optimal capital stock Problem of Manufacturing sector in UK Long term yield and investment Multiplier-Accelerator theory of Investment Marginal productivity, Cost of Capital and Tobins Q Exercises
Lecture 133 Investment is More Volatile than Output: Why?
Lecture 139 Financing an Investment Project Self Finance Bequests Bonds: Debt Finance Banks, Building Society, Insurance Equity Finance Stock Market (LSE) No Risk High Risk Maturity Instalment Method Repayment Method Financing of an Investment Project Demand for output Need for Capital
Lecture 1310 Low interest rate induces producers to substitute out labour by capital o
Lecture 1311 Y = f(K) K opt C = (r+ )K MPK Y Capital Output Optimal Capital Stock for a Firm MPK=MC
Lecture 1312 Y = f(K) KbKb MPKb Yb Capital Output & Cost Impact of Increase in the Interest rate on the Optimal Capital Stock for a Firm KaKa Ya MPKa Ra = (r2+ )K Rb = (r1+ )K r2 > r1
Lecture 1313 r-cost MPK 1 MPK2 K1K2 Impact of Technological Advancement in the Capital Stock 0
Lecture 1314 Lending is Growing with Lower Interest Rate in Recent Years
Lecture 1315 Marginal Productivity Theory of Investment -calculations
Lecture 1316 Marginal Productivity and the User Cost of Capital
Lecture 1317 Role of Investment Tax Credit in Promoting Investment Why Manufacturers Lobby for a Tax Credit? MPK K1K2 0
Lecture 1318 What is the optimal capital stock for a car company?
Lecture 1319 Optimal Capital Stock for the Car Company
Lecture 1320 Problem of the Manufacturing Sector in the UK
Lecture 1321 Input Prices are Volatile Because of the Volatility of Oil Prices
Lecture 1322 Investment is sensitive to the Long-term Yield than to Short Term Returns
Lecture 1323 Multiplier Accelerator Theory of Investment
Lecture 1324 Change in demand requires change in Capital stock New Investment meets this requirement Investment has multiplier effect on income There is more demand More demand for capital stock More investment and more output This process continues, until the economy reaches turning point There is a similar downward movement in output, investment and capital stock in the recessionary period. Essence of the Multiplier-Accelerator Theory of Investment
Lecture 1325 A Simple Illustration of the Multiplier Accelerator Theory of Investment
Lecture 1327 Exercises Optimal investment with a given production function and user cost of capital Impact of investment tax credit Whether to take or not take an investment project with a stream of projected revenues and certain cost How to deal with uncertainties?
Lecture 1328 Y= F(K,L) S C T Funds KFA Equity Treasury Bonds Deposit Banks Pension Funds Profit Link Between Financial System and the Economy
Lecture 1329 Three Sources of Financing an Investment Project Self-financing –Depends on retained earning –Personal savings Bonds –Banks, Building Societies and Trusts –Various maturities and risks Stocks –Market signals and equity prices
Lecture 1330 Savers Households, Corporations and Government Intermediaries Banks, Insurance Companies, Building Societies, Trusts, Stock and Bonk Markets Intermediaries Banks, Insurance Companies, Building Societies, Trusts, Stock and Bonk Markets Investors Small, Medium and Large Private, Public, Domestic and Foreign Investors Small, Medium and Large Private, Public, Domestic and Foreign θS=I =95 Transaction Charges (1-θ)S=0.05*100 = 5 S =100