Investment – AS/A LEVELS/IB/IAL
Investment – AS/A LEVELS/IB/IAL
Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes
Investment
Investment is the process of investing money for profit. Investment is a component of aggregate demand (AD).
AD = C + I + G + (X – M)
C = Consumption
I = Investment
G = Government Spending
X = Exports
M = Imports
Distinction between Gross and Net Investment
Gross Investment
This refers to the amount of investment carried out, ignoring any level of depreciation
Net Investment
This is the Gross Investment minus the value of depreciation
What impacts Investment?
Impacts on investment and consumption are very similar.
Access to capital
During the financial crisis even though interest rates were low. Businesses were unable to borrow money easily due to banks being extra cautious with lending.
Interest rates
An increase or decrease in interest rates can help to manipulate investment in the U.K. Economy.
Lower Interest Rates
Lower interest rates will also make it more attractive for businesses to borrow and invest in the U.K economy. This will have a positive multiplier effect on the economy.
Higher Interest Rates
Higher interest rates will discourage businesses to invest due to the higher interest repayment charges.
Taxes
A decrease or increase in taxes will impact the level of investment from businesses. An increase in corporation tax would reduce the investment made by businesses.
Business confidence – ‘Animal Spirits’
When businesses feel more confident about the future rate of economic growth being positive, they are likely to invest more to prepare for the future e.g. boom period in the business cycle.
State of the economy
If a country isn’t in a good economic position due to high levels or corruption or civil war. This could negatively impact business investment both domestic and from abroad.
Demand for Exports
If the economy is experiencing growth, the demand for exports will increase, causing a likely rise in investment by firms
Access to Credit
Less access to credit will suggest that the risk associated with an investment is likely to be greater and interest rates will be higher, resulting in firms investing less
Government and Regulations
The government can use their own policy decisions to encourage investment. e.g tax cuts or grants
A highly regulated economy may result in less investment due to the higher costs and time taken to pursue an investment
Quick Fire Questions – Knowledge Check
1. Identify and explain five factors impacting Investment (10 marks)
2. Explain how a change in interest rates affect the level of Investment (6 marks)
Next Revision Topics
- Aggregate Demand
- Economic Growth
- Government Spending
- Exports / Imports
- Employment & Unemployment
- Consumption
- Foreign Direct Investment
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