1. Capital Investment
Capital investment spending has an important effect on both the demand and supply side of the economy. This presentation considers the basic theories of investment, its impact on AD and AS.

2. Fixed Capital: plant and machinery, buildings, new technology
What is Investment?
Capital Investment
Is spending on capital goods that will allow increased output of goods and services in the future
Investment is not saving in financial assets such as shares and bonds
Fixed Capital: plant and machinery, buildings, new technology
Working Capital: spending on stocks of finished goods and raw materials / components
Human Capital (not included in the investment data) – building up the stock of human (labour) qualities and skills

3. Improve efficiency through better technology
Why Invest?
More Demand
Improve efficiency through better technology
Expansion and exploit economies of scale (lower LRAC)

4. Factors affecting Investment
The rate of interest- higher interest rates increases the cost of borrowing by firms and may make some investments unprofitable. It may also affect….
Consumer demand- higher demand requires higher output, and therefore increased productive output. This may itself be affected by
Spare capacity. If demand is increasing, but firms have spare capacity then they may not need to invest in additional machines etc
Firms’ Profitability. If profits are high then they can afford to invest. It also has an impact on….
Business confidence. If this is high then businesses may invest more
Government Policies- such as subsidies and incentives to invest
Banking and Financial institutions support to businesses.

5. Importance of Business Confidence
Investment projects inevitably involve a degree of risk
Revenue streams are uncertain (particularly in industries and markets that are sensitive to cyclical and exchange rate fluctuations)
Costs are subject to change over time
There is no guarantee that a project will yield the expected (or required) rate of return
Changes in business confidence can have a huge impact on planned capital spending projects
Confidence is affected by many factors – but is driven mainly by expectations (e.g. of future demand, costs, taxation etc)
A drop in business optimism can lead to delays in capital projects being given the go ahead or cancellations of entire projects

6. The Importance of Capital Investment to the Economy
The Government's central objective is to achieve high and stable levels of growth and employment. And, to achieve this requires a sustained expansion of our productive potential.
An increase in the share of national income given to capital investment is seen as a key source of long-term economic growth, for new investment can embody technological progress and act as a stimulant to improvements in labour productivity

7. Investment and Aggregate Demand
Investment is an important component of aggregate demand
A change in investment can have a multiplier effect on the overall level of national income
E.g. a £100 million capital project should lead to a much larger final increase in equilibrium GDP
Initial boost to aggregate demand and output
Employment creation effects
Output generates further incomes and spending through the circular flow
If extra investment improves the international competitiveness of Thai businesses in domestic and international markets – this injects extra demand into the economy through higher exports

8. Investment Adds to Aggregate Demand
LRAS
LAS
Higher capital spending boosts aggregate demand
Some capital spending leaks from the circular flow through imports
Price level
SAS0
105
100
AD0
AD1
6.0 Y1 Y2
GDP

9. Investment and Aggregate Supply
Capital spending can boost the supply-side of the economy
We can produce more
New capital means better technology – improving efficiency
Often a time lag between new capital investment being used and efficiency improving
Training required
Investment requires sufficiently high level of demand for it to be fully utilised/used
Higher levels of investment increase the scope for non-inflationary economic growth over time

10. Improvements in Long Run Aggregate Supply
Higher rates of capital investment boost the productive capacity of the economy – a source of long-term economic growth
If there is a rise in long run aggregate supply the economy can now sustain a higher level of demand
If aggregate demand shifts out, the economy can meet the extra demand because of the outward shift in LRAS
LRAS
LRAS2
Price level
AD2
AD1
6.0 Y3 Y4
Real GDP
Real GDP