Investment

Investment - INVESTMENT: Business/Government purchases of...

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INVESTMENT: Business/Government purchases of machines, equipment, new housing construction, changes in inventory Most volatile component of GDP Most difficult to predict Several variables that influence the level of investment 1. Interest Rates As interest rates increase businesses borrow less and this decreases the purchase of new equipment Reduces the level of investment spending Investment is an injection Cause a decrease in the GDP 2. Innovations and Changes in Technology New products are developed, companies feel the need to purchase products to enhance operations, manufacturing, processes, etc. Ex. in text computers, “autogas” increases investment/spending, increases the GDP 3. Government Policy and Taxes Policies affect business spending Ex. rent controls may decrease the number of new buildings being constructed This will decrease investment and decrease the GDP OR Taxes product causes and increase in price and if the price increases then demand decreases This will decrease investment and decrease the GDP OR Changes in the income tax act Changes in the way businesses can depreciate capital assets, causing businesses to pay more in taxes. There is less money available to spend on purchases of new equipment and causes a decrease in the GDP OR Changes in the philosophy of the political party. If government leans toward a free-market approach, investors are more likely to invest, which will increase investment and increase the GDP 4. Expectations About future environment Changes in the level of sales, profits and GDP Expectations about an active economy will increase the level of investment and increase the GDP 5. Replacements Equipment will wear out over time, the spending ti replace this equipment is investment, which increases the GDP 6. Cost of Capital Goods Prince increases causes a decrease in the purchase of new equipment, which causes a decrease in investment and a decrease in the GDP
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7. GDP Overall, when GDP increases level of he economy is increasing. If total income is increasing, house hold spending is increasing and investment business increases, increasing the GDP Government Spending Governments spend money on goods and services, causing the GDP to increase Export and Imports Final component is the difference between exports and imports RECAP: Planned Aggregate expenditure is the result of:
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This note was uploaded on 02/05/2011 for the course ECON 011 taught by Professor Yezer during the Fall '07 term at GWU.

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Investment - INVESTMENT: Business/Government purchases of...

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